Chilly jobs, warm wages

The jobs market ended 2024 with good news on pay. That’s if you have a job – and there was worrying evidence that it’s getting harder to find one. We delve into the detail below.

Employment is falling…

After two strong years, the jobs market cooled off markedly throughout 2024. Employee jobs fell again in December – by 47,000. The number may be revised but is consistent with weak employment PMI data for the same month.

More to the point, employment has been flat or falling since May. Meanwhile, the UK population has been growing quickly, driven by record immigration, so stable jobs numbers mean a falling employment rate. We estimate the 16+ employment rate to be 61.1 per cent in the three months to Nov 2024 – down 0.7 percentage points (equivalent to 374,000 workers) on the 2023 high point. Not a pretty picture.

When we look at changes in the 16+ employment rate, our measure is now pretty much in full-blown recession territory – every time it’s been this weak there has been a recession, except for the 2012 double-dip that was subsequently revised away.

So how loose is the labour market now? A key datapoint would be the unemployment rate. The ONS estimates this at 4.4 per cent, and rising, but again acknowledges that the number is particularly uncertain. One number we do have a better handle on is job vacancies. These have been falling pretty steadily since 2022, and while the number of vacancies is still bigger than pre-pandemic, the jobs market is bigger, so the vacancy rate is now lower than pre-pandemic times.

… but pay growth is strong…

So if the employment and vacancies rates are falling, pay growth should be falling too, right? Wrong.

Annual wage growth ticked up to 5.6 per cent (comparing the three months to November to the same period a year before). After accounting for inflation, this translates to a healthy real-terms pay increase of 2.5 per cent. This puts 2024 on course to be the best year for real pay growth since 2005 – the year that Brangelina got together, and Bolton Wanderers were flying high in the Premier League (yes I did have to Google this).

And this isn’t, not even mostly, a public sector story. Private sector regular pay rose at a scorchio 8.2 per cent annualised rate in the three months to November. It’s also showing up in other data – according to payrolls data, median pay rose by 5.6 in the 12 months to December 2024.

… so what gives?

Other things equal, cooling labour demand will tend to reduce wage inflation, as firms face less competition for workers. So what explains this month’s constellation of data? There are four basic possibilities:

1. It’s a blip
   RTI median pay levels ticked down in December, and the Bank of England’s Decision Maker Panel (which surveys businesses) suggests there is pay deceleration to come. Monthly AWE pay growth fell in November after two very strong months, but not below zero, suggesting that the strong preceding datapoints were not measured with error.
2. Weak employment reflects labour supply, not labour demand
   If people out of work aren’t looking for it, workers do not face competition from them and don’t need to moderate their wage demands. The places to look for this would be rising unemployment or falling participation rates. But inconveniently these are not currently measured well by the Labour Force Survey.
3. Workers are trying to catch up with higher prices and rising public sector wages
   Even though inflation has fallen, prices are still high, and workers may be pushing hard for pay increases to compensate. The Summer’s relatively high public sector pay award will, other things equal, push up on private sector pay demands. But private sector pay has grown faster throughout the year and, when comparing apples with apples, we don’t think there’s a material gap between pay levels in the two sectors.
4. Productivity growth has picked up so firms can afford higher wages
   As if.

The MPC will have to decide among these competing explanations as it gears up for next month’s interest rate decision.