Growing, but for how long?

This morning’s labour market data from the ONS had encouraging news in the shape of rising employment, coming from a reversal among the under 50s of the post-pandemic fall in participation. But inactivity among the over 50s and among those with long-term illnesses remains stubbornly high, there continue to be signs that firms’ demand for workers is cooling, and of course average pay, despite growing fast in cash terms, continues to fall in real terms. 

A growing workforce – but familiar problems unsolved  

The UK labour market continues to recover from Covid. After being budged off course by soaring energy prices in 2022, employment has now increased for six months in a row – rising by 256,000 since Q3 2022. Rising employment is coming from higher participation rather than from unemployment, which actually ticked up slightly to (a still low) 3.9 per cent in Q1 2023. 

Where does the recent rise in employment leave us in terms of the recovery? 

Measured by the number of people in work, as of Q1 2023 more than 90 per cent (869,000 out of 947,000) of the total ground lost during the pandemic has now been reversed – employment is just 78k below its Dec-Feb 2020 level. But of course, the population has also grown in this period; the working age population is up 196,000 since pre-Covid. This means the employment rate is a better way to chart the recovery. The 16-64 employment rate in Q1 2023 was 75.9 per cent, 0.7 percentage points below the pre-Covid level of 76.6 per cent, but 1 percentage point above the Covid low point. On this basis, two-thirds of the total Covid fall has been recovered. The glass half empty version is obviously that there remains a third to make up – 285,000 more people would be in work today if the employment rate was at its pre-Covid level.  

Unfortunately, although employment is currently rising at a decent pace, a full employment recovery isn’t likely. At least not any time soon. That is because we still face the participation hangover from the crisis. While inactivity among the under-50s has now all but returned to its pre-Covid level, inactivity among the over-50s remains stubbornly high (the inactivity rate among people age 50-64 was 27.2 per cent in Q1 2023, 2 percentage points up on Q1 2020). Inactivity among this age group is partly linked to inactivity through ill health, which is also still high – and still rising. The number of working age adults not working due to long-term ill health reached a new record of 2.55 million in Q1 2023. 

An interesting question is whether lower participation among the over-50s is a cohort effect (in which case we would expect following cohorts to have a higher employment rate, and the overall employment rate to eventually normalise) or an age effect (in which case future cohorts would end up in the same position as the current one – and the overall employment rate would not fully recover). Assuming (touch wood) that future cohorts don’t experience a global pandemic as they approach retirement, we might expect participation and retirement decisions to be more like those of older workers before the pandemic – implying a cohort effect, and a normalisation of employment. But even if that was the case, it will be several years before this cohort effect works its way through, so we are likely facing lower employment for some time yet. The caveat is that in terms of employment numbers (as opposed to employment rates) migration to the UK has recently been much higher than expected, and the OBR’s view is that this will more than offset lower participation among British workers. 

A tight but cooling labour market

Another reason the employment recovery might not have much further to go is that there are signs of cooling demand among employers. The number of vacancies continues to fall – for the 11th month in a row. And there was a surprise in HMC’s PAYE data, where the number of employee jobs fell 135,000 in April. This latter number may look a bit less alarming next month when we get the revised estimate, but we don’t tend to see revisions large enough to completely undo that fall.  

Of course, falling vacancies aren’t necessarily a marker of falling demand when accompanied by rising employment – it could be that demand is stable, and firms are able to fill vacancies as workers join the labour market. And vacancies remain high – they are 30 per cent above 2019 levels. But other data points tell a similar story – of a tight labour market, but of conditions loosening. The number of voluntary job moves was high in Q1 2023 but down 16 per cent on the previous quarter. And the ratio of unemployed to vacancies is also now starting to rise.  

The pay squeeze continues 

A tight labour market but very high inflation leaves us with a familiar picture on pay. Average weekly pay growth was 6.7 per cent in Q1 2023 – high, but still well below the current rate of inflation (CPI inflation was 10.1 per cent in March). This means the real terms squeeze on pay continues. And although the gap between pay growth in the public and private sectors is starting to close, it remains lower in the public sector – where annual pay growth is currently minus 3.1 per cent in real terms (versus minus 1.8 per cent in the public sector).  

Improving growth in public sector pay may start to ease the recent wave of strike action – 0.6 million days were lost to strikes in March. But, in addition to wider terms and conditions, strikes are about the level of pay as much as they are about current growth rates. If pay in the public sector had grown in line with the private sector over the past decade it would be 9 per cent higher today. That kind of gap isn’t closed overnight. 

Looking forwards, we might expect the patterns in the labour market to switch around in the coming months. Improving employment isn’t likely to last in the face of participation headwinds, while falling inflation may soon improve the picture on real pay growth pay growth. We are all still learning what a post-pandemic labour market looks like.