Unemployment nears record low but Britain’s pay squeeze deepens

A tight labour market has seen unemployment fall close to a record low, but surging inflation means that Britain’s ongoing real pay squeeze is getting deeper, particularly for low earners, the Resolution Foundation said today (Tuesday) in response to the latest ONS labour market statistics.

The latest ONS data depict the benefits of a tight labour market, with employment rising to 75.6 per cent, unemployment falling to 3.9 per cent in the three months to January, close to its record low of 3.8 per cent, and vacancies hitting a record high of 1.3 million.

However, the overall size of the workforce is still below pre-pandemic levels, with older male workers leaving the labour market driving economic inactivity up to 21.3 per cent. This rise in economic inactivity shows there may be limited road left in terms of boosting employment, says the Foundation.

The picture on pay is more mixed, with typical nominal pay for payrolled employees falling in the month of February, while the wider measure of average earnings showed nominal pay growth strengthening somewhat in January.

Annual RTI nominal monthly pay growth in January is strongest among high earners (up 6.5 per cent at the 99^th percentile, compared to 0.6 per cent at the 10^th percentile). These pay trends help to explain the UK’s revenue-rich recovery, but also means real wages will fall fastest for those who can least afford it. The National Living Wage rises 6.6 per cent in April, but prices will probably be rising faster at that point.

Indeed, the Foundation adds that with inflation forecast to hit least 8 per cent in the spring – and with a second spike due in the autumn – real wages will soon be falling throughout the economy. The UK’s ongoing real wage squeeze will get deeper over the course of 2022, with a return to real wage growth not likely before mid-2023.

Nye Cominetti, Senior Economist at the Resolution Foundation, said:

“The UK labour market continued to strengthen in early 2022, with unemployment falling to 3.9 per cent in the three months to January, nearing a record low. The huge increase in older workers exiting the labour market suggests we may be reaching the limits of Britain’s jobs recovery.

“The picture on pay is more mixed, with wages rising fastest in high paying sectors like finance and among high earners.

“But overall surging inflation will wipe out any wage gains in 2022. Britain’s real pay squeeze, which started as far back as summer 2021, will get deeper in 2022, and is unlikely to end until summer 2023.”