The growth in real wages between May and July fell at almost the fastest rate since comparable records began in 2001, heightening concerns that a fall in consumer spending power will push the UK economy into a downturn.
Employees’ pay, including bonuses, rose by 5.5 per cent in the three months to July to £613 a week, according to figures published by the Office for National Statistics. Pay excluding bonuses rose by 5.2 per cent to £571.
After adjusting for inflation, which averaged 9.5 per cent over the period, total pay fell in real terms by 2.6 per cent. The decline is more severe when excluding the impact of bonuses, with real pay falling by 2.8 per cent over the year.
The gap between the rise in pay in the public and private sectors has widened to a record outside the pandemic period, with private sector workers receiving an average pay rise of 6 per cent compared with only 2 per cent in the public sector. Total and regular pay growth rates are at a similar magnitude, which has not been the case for several months, the statistics office said.
It is the largest fall since February to April 2009, when it fell to 4.5 per cent at the height of the financial crisis. However, the number of job vacancies continued to fall as the jobs market showed the first signs of loosening. There were 1.3 million vacancies in the three months to July, down by 34,000 from the previous quarter.
The unemployment rate remained close to a historic low at 3.6 per cent, the lowest level since May 1974, with 71,000 workers joining payrolls, taking the total in work to 29.7 million. Economists polled by Reuters had predicted the jobless rate would remain at 3.8 per cent.
However, the fall in the number of people out of jobs has been accompanied by a rise in the number of people leaving the workforce altogether. The rate of economic inactivity, which is the number of people who are neither working nor available to work, rose by 0.4 percentage points to 21.7 per cent, putting it 1.5 per cent above its pre-pandemic level.
The jobs market has held up better than expected since the pandemic, with the government’s furlough scheme helping to prop up employment levels and a shortage of workers leading to record talent gaps in lower-skilled sectors. Strikes, which had been planned across a large swathe of sectors including rail and postal delivery services, have been cancelled temporarily after the death of Queen Elizabeth II.
Workers including railway staff, BT call centre staff, Openreach engineers and barristers have walked out in recent weeks over pay disputes as their wages fail to keep up with the soaring cost of living.
Inflation hit a fresh 40-year high of 10.1 per cent in July and is expected to rise further.
The Criminal Bar Association said that barristers’ demonstrations, which had been planned for this week, had been cancelled “out of respect”, but because of the fact that there had been “no movement” from the government on their dispute, industrial action would continue.
Yael Selfin, chief economist at KPMG UK, said: “Labour market tightness is of little consolation to workers as inflation weighs on real incomes. Leading indicators, including the KPMG/REC survey, suggest that staff availability has now returned to pre-Covid average. While this implies that the vacancy rate could drop in the coming months, longer-term structural trends such as slowing population growth will likely weigh on labour supply.”
Kitty Ussher, chief economist at the Institute of Directors, said the low unemployment rate is good news for households.
“Although the effect of inflation has caused real pay to fall — by 2.8 per cent on the year, causing difficulties for many — the jolt to family budgets from high unemployment would be significantly worse,” she said.
“More disturbing is the continuing rise in economic inactivity. Some of this is due to having more students, but also to increasing numbers of over-50s being denied the ability to work due to long-term illness.”
Analysis
Unemployment has long been considered the headline measure of the health of the labour force. Previous downturns, such as the one that followed the financial crisis of 2008, have been characterised by negative economic growth and high levels of unemployment as demand dried up and there was less of a need for workers.
Today’s economy is different: the headline figures suggest that the jobs market has boomed since the pandemic, with a shortage of workers leading to high demand in sectors such as hospitality. Unemployment has fallen to its lowest level since 1974 at 3.6 per cent.
However, these measures disguise significant weaknesses. More than a fifth of the workforce was “inactive” in the three months to July, the latest figures show. The rate of inactivity, which is the number who are neither working nor available to work, rose by 0.4 percentage points to 21.7 per cent, putting it 1.5 per cent above its pre-pandemic level.
Unemployment is falling not because workers are getting jobs but because they are unable to work. Those leaving unemployment are entering inactivity in greater numbers than they are entering the workforce, with employment below pre-pandemic levels and falling further.
Of those inactive, most are older workers — and the main reason is long-term sickness. The number out of work due to long-term ill health is rising at its fastest in three decades, having jumped by more than 350,000 in two years and 130,000 in the last three months alone.
Martin Beck, chief economic adviser to the EY Item Club, said: “The decline in joblessness disguised what was only a modest 40,000 rise in employment, the smallest since January to March, with a rise in inactivity playing a bigger role in pushing unemployment down. Moreover, the single-month data showed that the number in work in July falling on three months earlier to the greatest extent since January 2021. This suggests that the weak economy is starting to have an adverse effect on the jobs market.”
Government support for those out of work focuses solely on the unemployed, who can access benefits and support to get back into work. There is no help for the inactive to re-enter the workforce.
Tony Wilson, director at the Institute for Employment Studies, said that the figures should be “sounding alarm bells” for policymakers.
A sole focus on unemployment, without seeing it in conjunction with levels of employment and inactivity, does not tell us what we need to know about the health of the workforce.
