Good news in the latest labour market data for the Bank and the Chancellor, but bad news for the general public

This morning’s labour market stats bring good news and bad news. An uptick in workforce participation is good news for everyone, while signs of weakening pay pressure might ease the Bank of England’s inflation concerns. But a wider cooling of demand (seen in falling vacancies, and rising unemployment and redundancies) don’t bode well for workers. Real pay continues to fall sharply, particularly in the public sector where December saw a post-2011 high point in industrial action. And the number of workers on zero-hours contracts reached a new record – with the increase concentrated among younger workers. 

Good news for the Bank of England 

On the surface, this morning’s stats continue to show a ‘tight’ labour market: unemployment is close to record lows at 3.7 per cent, and vacancies are 40 per cent higher than before the pandemic. But there are signs that employers’ demand for workers is beginning to cool off: vacancies, although still high (1.1 million), fell for the eighth month in a row. This is being driven mainly by private sector industries, where vacancies are down 17 per cent from their peak in early 2022. 

There are tentative signs that this lower demand could be reducing upwards pressure on wages. Regular pay grew by 6.7 per cent over the year to December, and 7.3 per cent in the private sector – the highest rate since 2000 aside from the pandemic period. (This is in cash terms, so is not the best measure of workers’ living standards – we will come back to this below.) But pay growth over shorter periods of time is starting to slow down. Pay growth measured over three-month periods has fallen from the equivalent of 9 per cent a year in July to 7 per cent a year in December. 

This is good news for the Bank of England as it tries to bring down inflation, where its concern has been that current rates of pay growth – well above underlying productivity growth – will contribute to second-round inflation effects as employers in turn pass on higher wage costs.  All else equal, softening wage pressure with still-low unemployment may therefore mean that monetary policy has to do less (and unemployment doesn’t have to rise as far) to reduce inflation.  

Good news for the Chancellor 

At the same time as employer demand is weakening, the supply of workers is beginning to increase. The number of people who are economically inactive has fallen by 113,000 in the latest quarter – a (small) reversal of a longer-term trend that has dominated the post-Covid-19 labour market. This meant that both employment and unemployment rose slightly in the latest quarter, as some of those who re-entered the workforce went straight into work and others are still job-hunting. 

This will be welcome news for the Chancellor, who has highlighted increasing workforce participation as a key priority given its role in driving economic growth (and tax receipts). But it is worth noting that the bulk of the falling inactivity rate came mainly from falling numbers of students, rather than the return of those who are at risk of leaving the labour market for good – although the number of people whose main reason for inactivity is long-term sickness is also down slightly on the quarter. (We’ll be discussing workforce participation more widely at a Resolution Foundation event and in a new report next week.) 

But bad news for the general public 

All this, however, will be of little consolation for most of the workforce. In the longer term, households will benefit from the falling inflationary pressure signalled by a cooling labour market – but in the short run, workers are seeing their living standards eroded by the cost of living crisis. 

First, strong pay growth in cash terms is still not keeping pace with rising prices: after adjusting for inflation, average wages fell by 2.5 per cent in the year to December. And real pay falls were far worse in the public sector, where wages fell by 4.7 per cent in real terms (compared to 1.8 per cent in the private sector). 

Second, zero-hours contracts reached a new record of 1.13 million in the three months to December, with the increase concentrated among younger workers and in the hospitality sector. This highlights the importance of focusing on job quality, as well as employment and pay. While zero-hours contracts can be desirable for some workers, there is a risk that employers use them as a form of one-sided flexibility, leaving workers with little control over how much or when they work; this risk will only grow if a slowing jobs market leaves workers with fewer alternatives. 

Finally, falling real wages, the public-private sector pay gap, and wider working conditions are fuelling widespread strike action. In December, the number of days lost to strike action reached its highest level in 11 years – 861,000 days were lost, twice the November figure. This will increase again in next month’s data which will reflect the strikes in January. 

Overall, then, despite good news for policy makers at both the Bank of England and HM Treasury – and longer-term benefits for households from lower inflationary pressure ahead – the takeaway from this morning’s data for most of the public is a continued squeeze on living standards. And the future may be still bleaker: despite the Bank of England becoming less pessimistic, partly thanks to falling energy prices, they still expect unemployment to rise in the years ahead.