Tight labour market may see Britain’s pay squeeze bottom out, but is not turning around our shrinking workforce

Britain recorded its sharpest real pay fall since 1977 this summer. But with nominal pay growth strengthening and the Energy Price Guarantee set to reduce inflation by around four percentage points relative to what it might otherwise have been, the depth of Britain’s pay squeeze may bottom out this autumn, the Resolution Foundation said today (Thursday) in response to the latest ONS labour market statistics.

The labour market remains tight with unemployment falling to 3.6 per cent and nominal regular pay growth strengthening to 5.2 per cent in the three months to July. However, with CPIH inflation hitting 8.3 per cent over this period, real regular pay fell by 2.8 per cent – close to its sharpest fall since 1977.

However, the Foundation notes that while the outlook for inflation remains highly uncertain, the Energy Price Guarantee could prevent a second inflation spike this winter, taking around four percentage points off inflation relative to what it could have been.

Were inflation to remain at around its current rate of just over 10 per cent, real wages in Britain are unlikely to fall any faster than they are now, though they are likely to keep falling for another year – by which time around 20 years pay growth will have been wiped out.

There are further signs that wider economic turmoil is beginning to affect the jobs market – with a falling employment rate, falling vacancies and now redundancies bottoming out as signs that labour demand has started to fall as the economy plateaus.

Worryingly, the cost of living crisis has yet to encourage people back into the workforce. The inactivity rate has fallen again this month, driven by the long-term sick and students.

Gregory Thwaites, Research Director at the Resolution Foundation, said:

“Pay settlements strengthened over the summer, but not by enough to keep up with rapidly rising inflation. As a result, pay packets have kept shrinking at close to their fastest rate since 1977. The only chink of light is that a more benign outlook for inflation means that they might not shrink any faster, although they won’t grow for another year.

“Wider economic turmoil also looks to be affecting the jobs market. Instead of the cost-of-living crisis tempting people back into work, more people are exiting the jobs market altogether, primarily due to poor health reasons.”