UK labor market shifts as inflation slashes real wage | Economy
Jeremy Hunt was candid in his response to the latest official figures on the state of the UK labor market. High inflation, the Chancellor said, was eroding the value of paychecks. People’s salaries weren’t going as far as they should.
Hunt has sought to blame Vladimir Putin for the rising cost of living, but while Russia’s invasion of Ukraine has certainly given an unwanted boost to inflation since the start of this year, the picture is more complex than that.
In the decade since the end of the 2007-2009 global financial crisis, the percentage of the working population has steadily increased and the percentage of economically inactive has decreased. Employers had no problem filling vacancies and therefore had an advantage in wage negotiations. Annual income growth has remained modest even as unemployment has fallen to levels not seen since the mid-1970s.
Then the pandemic arrived. Inactivity has started to rise again and, although it is still lower than it was a decade ago, it is up 1.4 percentage points from the level before the outbreak. of Covid-19 in the UK at the start of 2020. The employment rate moved in the opposite direction, down 1.1 points.
The increase in the number of long-term sick people seems to be the main reason for the decline in labor supply. In the past, the trend was strongest among workers aged over 50, but the Office for National Statistics said younger age groups were mainly responsible for the 0.2 point rise in inactivity during the three months preceding September. Shadow Chancellor Rachel Reeves says longer NHS waiting lists – over 7million – are partly to blame.
A shrinking workforce has meant businesses have struggled to fill vacancies that have become available as lockdown restrictions have been lifted. Unions were able to negotiate higher wages because their bargaining power increased. But although growth in total compensation – which includes bonuses – is growing at an annual rate of 6%, wages are still failing to keep up with prices. This is especially true in the public sector, where wages are only rising a little over 2% year-on-year.
Workers and employers reacted to the state of the labor market in different ways. Falling real wages have led to an increase in labor disputes, with the number of days lost on strike at its highest level in more than a decade. Meanwhile, employers’ groups have urged the government to ease migration rules to boost labor supply.
The moment may have passed as the latest data from the ONS suggests the labor market is turning around. Vacancies, while still historically high, fell for a fourth consecutive quarter; employment fell by more than 50,000 in the three months to September; and the unemployment rate rose slightly. These trends are likely to continue through the winter as policy tightening by the Bank of England and Treasury combine with rising energy bills and falling real incomes to slow the economy significantly.