Why is the UK labour market so hot?

The UK jobs market is defying gravity. For months, Bank of England officials have warned that households should expect to feel poorer, as higher energy costs and rising interest rates made employers less willing either to hire or to raise wages in line with inflation.

But the latest official data, released on Tuesday, showed workers in a position of strength. Unemployment remains close to record lows. Employment has finally climbed above its pre-pandemic level, with a record 33.1mn people in work, even if the employment rate is still lower than in 2019.

And although inflation has been eroding the value of workers’ pay since late 2021, that may be about to change. In April — the last month covered by the data — average wages, excluding bonuses, were up 7.5 per cent year on year, growing only slightly slower than inflation on the Office for National Statistics CPIH measure, which includes housing costs.

“Record pay growth across Britain means our 18-month run of falling real wages may have ended,” said Hannah Slaughter, senior economist at the Resolution Foundation think-tank. But, she added, the acceleration in wage growth, while welcome for workers, would “worry the Bank [of England], and by extension anyone looking to remortgage”.

The big question for monetary policymakers is whether the near-record pace of wage growth can be expected to slow as inflation moderates, or also reflects more lasting labour shortages that have increased workers’ bargaining power.

James Smith, economist at ING, said there was “no doubt that inflation is a key factor”, as it was the main determinant of this year’s 9.7 per cent increase in the minimum wage, reflected for the first time in the data.

Consumer price inflation, which eased only to 8.7 per cent in April, has been cited in business surveys as the main source of upward pressure on pay, raising hopes that wage pressures would subside as energy prices fell.

But the ONS figures show wage growth has been stronger in sectors such as finance and manufacturing — where pay relies on workers’ ability to demand higher wages — than in areas such as retail, which have a high share of employees earning close to the minimum wage.

Public-sector pay growth has picked up, even as doctors, nurses and teachers have threatened further industrial action. Unions have also won some striking pay deals in parts of the private sector where staff are scarce.

Earlier this week, Unite paused planned strikes at Heathrow airport while its members voted on a new offer that would match pay with retail price inflation this year and link it to inflation in 2024.

Unite has also called off planned industrial action at a Coca-Cola bottling plant in Wakefield after securing a deal that will raise pay by more than 10 per cent for high-paid technicians, and by as much as 18 per cent for some of the lowest-paid clerical staff.

Neil Carberry, chief executive of the Recruitment & Employment Confederation, said labour shortages “amplify the impact of inflation”, as employers were raising wages both to fill roles and in response to cost-of-living pressures on their staff.

But the latest data contained some signs of shortages easing. Vacancies are still high in many professional areas but have dropped below pre-pandemic levels in some lower-paid sectors such as retail.

The workforce, which shrank after the onset of Covid-19 as young people opted to study longer and older people dropped out, is expanding again as fewer people choose early retirement or opt to stay at home to care for family.

Although long-term sickness is keeping growing numbers out of work, the overall rate of economic inactivity has fallen sharply in the past few months, with the biggest drop seen among older people. Growing numbers of migrants from outside the EU have also bolstered employment.

Simon French, economist at Panmure Gordon, said this suggested there was still scope for the UK workforce to grow in response to employers’ wish to hire.

Rapid nominal wage growth was “inevitable” given the even higher rate of inflation, he said, but “whether it is a wage price spiral where the negotiating power of labour can continue to keep up with prices, I’m more sceptical”.

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