Fewer students, more ill health: the wrong kind of labour-market participation

Today’s labour market data depicts an expanding workforce, reversing some of the shrinkage we saw during the pandemic. But, like Homer Simpson, it’s expanding and receding in all the wrong places – due to fewer students rather than less long-term sickness. In better news, employment kept rising and unemployment remains low. Public sector pay growth narrowed the gap with the private sector, although real pay is still falling for both groups.

More work but less homework

In the three months to February, employment grew by 169,000 – a decent clip. Unemployment increased slightly too, by 49,000, as labour supply grew a bit faster than labour demand, with economic inactivity falling by 226,000. But the unemployment rate remains low at just 3.8% (figure 1). Overall, while perhaps a smidgin looser than last month, the labour market remains tight.

But the recent fall in economic inactivity is driven by falling numbers of students: those inactive due to education fell by 181,000 on the quarter (figure 2). This partially reverses a trend we weren’t worried about in the first place: more education is generally a good thing for employment, wages and productivity in the long run. The fraction of students combining work and study did rise slightly, perhaps in response to cost-of-living pressure. But the absolute number of students also fell: the number of 18-24-year-olds in full-time education is down by 148,000 on the quarter.

In contrast, inactivity due to poor health rose again, to a new high of over 2.5 million. My recent report with Louise Murphy looks at this enduring problem in the wider context of demographic and social change over the coming decade.

Meeting in the middle – public and private pay growth narrow the gap

Turning to pay, growth in the headline measure – average total pay in the last three months compared to a year before (the so-called 3-on-12) – was flat on the month at 5.9 per cent. But this obscures a subtle picture, both between sectors and over time.

Depending on the time window we are looking at, private sector regular pay – the bit that matters most to the Bank of England as a gauge of inflationary pressure – either accelerated, decelerated, or stayed the same. The 3-on-12 for private sector regular pay decelerated slightly from 7.0 to 6.9 per cent growth. But a big 0.9 per cent jump in the level of private sector pay between January and February, following a few months with little or no growth, mean that private regular pay in February 2023 alone compared to February 2022 (the 1-on-12) accelerated from 6.5 to 7.3 per cent. Taking the past few months together, it seems clear that pay growth has decelerated since the heady days of Summer 2022, but perhaps not yet to rates that the Bank can be comfortable with.

It seems clearer that the gap between private and public total pay growth – as much as 6.4 percentage points last Spring – has shrunk substantially to only 0.8 percentage points in the three months to February. But real wages are still falling for both groups, at 2.3 per cent per year on average.

Stepping back – improving pay and conditions in the UK labour market

Stepping back from the monthly data, the UK has made huge progress in reducing the incidence of low pay. But more remains to be done here, and on improving other terms and conditions for those in low paid work. See our report on Good Work, launched tomorrow as part of our Economy 2030 Inquiry, for concrete proposals.