UK average earnings start to fall despite labour shortage

The UK’s labour shortage worsened at the end of 2021, with vacancies climbing to a record, but average earnings began to fall as inflation outstripped growth in pay.

Official data published on Tuesday showed unemployment fell to 4.1 per cent in the three months to November, 0.1 percentage points above its pre-pandemic rate. The employment rate rose to 75.5 per cent, but remained 1.1 percentage points below its pre-crisis rate — due to a rise in inactivity that the Office for National Statistics said was driven by older workers dropping out of the labour force.

With employers struggling to recruit, the number of vacancies rose to a record of 1,247,000 in the three months to December, equivalent to four in every 100 employee jobs in the economy, with a quarter of a million posts unfilled in health and social care alone.

There was little sign of any hit to employment in the early stages of the Omicron outbreak, with real-time data for December showing the number of payroll employees rising by 184,000.

Rishi Sunak, chancellor, said the figures showed the jobs market was “thriving”, and economists said the data strengthened the case for higher interest rates to stop the economy overheating. Yael Selfin at KPMG said that if remaining coronavirus restrictions were lifted next week, “the labour market could become even hotter, vindicating the Bank of England’s hawkish stance before Christmas”.

But Tony Wilson, director of the Institute for Employment Studies, said the figures were “disappointing”, with inactivity rising despite unprecedented demand for staff. “With nearly as many vacancies as there are unemployed people, employers are facing the tightest labour market in at least 50 years, with labour shortages now holding back our recovery,” he said.

“The good news is that the unemployment rate is back to within a whisker of its pre-pandemic level, but the same cannot be said for the number of people actually employed,” said Kitty Ussher, chief economist at the Institute of Directors, adding: “the legacy of the pandemic appears to be this rise in economic inactivity”.

Helen Barnard, policy director at the charity Pro Bono Economics, said there would be “no quick fix” to the rise in economic inactivity because it was driven by growing numbers leaving the workforce due to long-term illness, with “sustained and tailored support” needed to reverse the trend.

While staff scarcity has driven faster wage growth in some sectors, the ONS said average earnings were now falling in real terms, with inflation outpacing pay gains. Its headline measure of growth in average weekly earnings, excluding bonuses, was 3.8 per cent for the three months to November — leaving earnings flat in real terms over the same period, and down 1 per cent in November alone.

James Smith, economist at ING, argued that growth in employment and wages would slow over the coming months, after a period in which both employers and employees had been “playing catch-up”, and that the Bank of England would not raise interest rates as much as markets were currently expecting.

Hannah Slaughter, senior economist at the Resolution Foundation, said that while the jobs market was healthy, falling wages would worsen a cost-of-living crunch, adding: “The big picture is that Britain will emerge from the pandemic with pay packets shrinking, and over a half a million fewer people in the labour market.”