Cooling Labour Market Means Next Government Will Have To Tackle The Problem Of Falling Employment, Not Falling Inflation

12th June 2024

The UK labour market continues to cool, with the employment rate only just above its mid-pandemic low point, suggesting that kickstarting jobs growth will be a major task for the next government, the Resolution Foundation said in response to the latest ONS labour market statistics.

The latest data showed widespread signs of cooling, although data uncertainty make some indicators noisier than usual. The unemployment rate has increased for four months in a row - from 3.8 per cent in the last quarter of 2023, to 4.4 per cent in the three months to April 2024 - an increase of increase of 190,000.

Vacancies have fallen for 23 out of the past 24 months, and the number of employees in the PAYE data has fallen for three out of the past four months, after rising for 35 months in a row.

Economic inactivity also rose to 22.3 per cent, and long-term sickness hit a record high of 2.83 million, though methodological issues in the Labour Force Survey make this number uncertain.

Worryingly, the 16-64 employment rate fell again to 74.3 per cent, and is now only slightly above the pandemic low point of 74.1 per cent, set in winter 2021. The huge 1.9 percentage point fall from the UK's pre-pandemic 16-64 employment rate of 76.2 per cent means that, holding population constant, the workforce is more than a million workers smaller.

Despite this cooling, wage growth has remained resilient, with real regular average weekly earnings growing by a healthy 2.3 per cent - the strongest we've seen since 2015 (excluding the pandemic).

However, real earnings are still 1.6 per cent lower than their pre-cost of living crisis peak (April 2021), and 4.8 per cent lower in the public sector. Furthermore, with productivity actually falling over this period, policy makers will be concerned that this level of wage growth cannot be sustained – it will either peter out, or push up inflation.

The big picture remains that average earnings remain more than £14,000 a year off their pre-financial crisis path after 16 years of wage stagnation.

Nye Cominetti, Principal Economist at the Resolution Foundation, said, "The labour market has continued to cool in early 2024, with both unemployment and inactivity up. Worryingly, the UK employment is closer to its mid-pandemic lows, than its pre-pandemic highs.

"Turning around this poor performance, and kickstarting the kind of jobs growth Britain experienced in the 2010s will be a key task for the next government.

"But while the jobs market weakens, pay packets remain resilient. This recent spurt of real wage growth, the strongest in an almost a decade, will be a relief to workers and a worry for the Bank of England. But it can't be sustained unless productivity picks up."