STOCK London UK economy
Unemployment held near the lowest since 1974, and vacancies remained at a near-record level. Image Credit: Bloomberg

London: British workers rejoined the labour market at the fastest pace since before the pandemic as the cost of living crisis drew more people into jobs.

The count of working-aged people outside the jobs market fell by 144,000 in the quarter through May, the Office for National Statistics said Tuesday. Employment surged 296,000, more than the pace of 170,000 that economists had expected.

The figures suggest that chronic job shortages could be starting to unwind as workers fill a glut of vacancies that popped up when lockdowns to control the virus ended. Continuing that trend could alleviate some of the concerns the Bank of England has about tightness in the jobs market pushing up inflation.

“The labour market remains extremely tight,” said Kitty Ussher, chief economist at the Institute of Directors. “Having said that, there is a suggestion that things might be beginning to settle.” For the month of May alone, employment rose back above pre-pandemic levels for the first time a further sign that labour market is slowly returning to more normal dynamics.

Inactivity rate

The inactivity rate, which surged during the pandemic, remains one of the biggest puzzles facing policymakers. The number of inactive people neither in work nor looking for jobs is 378,000 higher than it was before coronavirus hit in early 2020.

Lockdowns prompted older people to leave the jobs market and younger ones to stay in education. Many cited long-term illness as the reason for not working. Now, some of those trends appear to be reversing. The drop in inactivity, as people re-entered the labour market, was most pronounced among older people. Including those aged 65 and over, inactivity fell by 225,000 - with 130,000 of them aged 50 and over.

For now, the overall labour market continued to underscore strains that companies say are starting to weigh on their output. Unemployment held near the lowest since 1974, and vacancies remained at a near-record level.

Money markets are betting on an 80 per cent probability of a half-point rate hike from the Bank of England in August, having baked in such a move last week.

“Today’s figures continue to suggest a mixed picture for the labor market,” said David Freeman, head of labor market and household statistics at the ONS. “While the number of people neither working nor looking for a job is now falling, it remains well up on where it was before Covid-19 struck.”

Wage growth

With inflation on course to hit double digits, workers are using their bargaining power to seek matching pay increases. Public-sector employees are threatening strike action if their settlements fall short. The BOE is worried that a wage-price spiral could ensue that stops inflation falling back as forecast.

Wage growth excluding bonuses ticked up, but at a rate much slower than inflation. Adjusted for prices, real wages fell 2.8 per cent, more than at any point since records began in 2001.

“UK workers are suffering the worst pay squeeze in modern history,” said Frances O’Grady, general secretary of the Trades Union Congress. “We can’t go on like this.”

Unemployment held at 3.8 per cent in the three months through May. The economy now has more vacancies - around 1.3 million - than people looking for work. Private-sector companies added a further 31,000 payrolls in June, half the pace economists had expected. Redundancies hit a new record low. A decision on public-sector pay increases for around 2.5 million public-sector workers could come as early as today. Doctors, nurses, teachers and police say there are prepared to strike if they’re asked to take real-terms cuts.

There are reports the Treasury is willing to boost pay by 5 per cent, more than the 3 per cent it had suggested as a guideline. Private-sector pay growth averaged 7.2 per cent in the latest three months, though some of that has been granted through one-off bonuses. By contrast, public sector wages grew much slower at 1.5 per cent.

The squeeze on living standards is expected to weigh on the economy later this year and push up unemployment.

However, that’s unlikely to stop the BOE from delivering further rate increases, with outgoing policymaker Michael Saunders warning on Monday that borrowing costs are likely to rise above 2 per cent in the next year. Investors are more hawkish, with money markets pricing in an aggressive half-point increase in August to 1.75 per cent and rates at 3 per cent by the end of the year.

“Today’s figures underline how strong our jobs market continues to be, providing encouragement in uncertain economic times,” Chancellor of the Exchequer Nadhim Zahawi said. “I am acutely aware that rising prices are affecting how far people’s hard-earned income goes, so we are providing help for households through cash grants and tax cuts.”