Demand for workers is strong as the UK economy emerges from two years of pandemic-induced disruption. The supply of workers has been reduced by an increase in long-term sickness affecting mainly the over 50 age group.
As a result, there is enough upward pressure on pay to persuade the Bank of England to continue raising interest rates, but the big squeeze on living standards has begun.
The latest bulletin from the Office for National Statistics shows there is upward pressure on pay, but even so wages were struggling to keep pace with rising prices at the turn of the year and the gap looks set to widen during the course of 2022.
Rishi Sunak said the labour market had bounced back more rapidly than many people expected – and the chancellor is right about that.
Few would have imagined that following the end of the furlough scheme last autumn the unemployment rate in the three months to January would stand at 3.9%, within a whisker of its pre-Covid low. Or that more timely data from HMRC would show 275,000 people added to payrolls in February.
Meanwhile, the pool of available workers shrank by 100,000 in the three months to January, in large part because of people retiring or being long-term sick. Firms are having trouble filling the record number of job vacancies, hence the upward pressure on pay.
Even so, in the three months to January, pay barely kept up with prices. Pay including bonuses over that quarter was 4.8% higher than a year earlier, up from 4.6% in the three months ending in December. But the ONS says the annual inflation rate was running at 4.7%, leaving workers hardly any better off.
The Bank of England has been surprised by the strength of the labour market in the past and is unlikely to be deterred from raising interest rates by the latest official jobs data, despite the uncertainty caused by Russia’s invasion of Ukraine.
Yet higher borrowing costs, higher taxes and higher energy costs will weaken demand for labour over the coming months. For workers, this may be as good as it gets for quite a while.
