After months in which it has defied gravity, a prolonged period of flatlining growth has finally caught up with the UK labour market.
The latest bulletin from the Office for National Statistics shows unmistakeable signs of weakness. Employment and job vacancies were down, while unemployment and redundancies were up.
These are all evidence of the labour market softening and will be seen by the Bank of England as proof that the 14 increases in interest rates since December 2021 are having an impact. There was a fall of 66,000 in employment in the three months to June, and while the ONS cautions against reading too much into the monthly figures, there was a massive drop of 567,000 in employment in June alone.
Despite a fresh increase in the number of people inactive because of long-term sickness, more people have been looking for jobs in recent months in response to the squeeze on household budgets caused by the cost of living crisis. The combination of weaker demand for labour and a rise in the supply of workers meant the unemployment rate rose by 0.3 percentage points to 4.2% between the first and second quarters of 2023. The jobless rate in June was 4.6%.
The one exception to this evidence of a cooling labour market was annual pay growth, which at 7.8% was the highest since modern records began in 2001. Including bonuses, the figure was even higher at 8.2%, although that was mainly because of a one-off payment to NHS staff.
That level of earnings increase may well persuade the Bank of England to announce yet another increase in interest rates when its monetary policy committee (MPC) meets next month. For the first time since inflation started to soar, growth in total pay is running ahead of price increases.
The question for the Bank is whether that level of earnings growth is likely to be sustained as jobs become harder to find, given that the official data for earnings reflects conditions as they were a few months ago rather than current demand for workers.
Samuel Tombs, a UK analyst at Pantheon Macroeconomics, says it usually takes time for changes in the labour market to feed through to wage growth, and that earnings growth may well have topped out. Several survey indicators now point to slowing wage increases, Tombs notes.
“For instance, the net balance of recruiters reporting that salaries are rising for new hires fell to a 27-month low in July, and now is below its average in the second half of the 2010s, according to the report on jobs survey.”
Even with the labour market turning downwards, Tombs thinks the MPC will push up rates from 5.25% to 5.5% in September. Ruth Gregory, a UK analyst at Capital Economics, agrees. Both, though, think that will be the peak. The risks of interest rate overkill are rising fast.
