Britain’s workforce expands – but firms’ demand for workers is cooling

Rising employment and falling economic inactivity drove a big expansion in the workforce in early 2023 – putting aside fears that it had been permanently shrunk by the pandemic. But more recent data showing falling vacancies and the first decline in payrolled employment in over two years, suggest that firms’ demand for more workers is cooling, the Resolution Foundation said today (Thursday) in response to the latest ONS labour market statistics.

The latest official data showed the UK labour market continuing to expand and normalise after the pandemic. The employment rate rose to 75.9 per cent – still down 0.7 percentage points (equivalent to 285,000 people) on pre-pandemic levels, but with two-thirds of the total fall during Covid now reversed. The uptick on unemployment was driven by people moving from inactivity, rather than by people falling out of employment.

The Foundation notes that almost all of the post-pandemic rise on inactivity among those under 50 has now been unwound – falling by 156,000 in the last three months alone – allaying fears that the pandemic has permanently put younger people off work. However, the longer-time rise in inactivity due to ill-health has reached a fresh record high of 2.55 million.

The number of workers resigning and moving jobs (a sign of worker confidence and an indicator of labour market tightness) was 322,000 in the three months to March 2023, still high by historic standards but down 16 per cent on the previous quarter.

More recent data on vacancies (down 55,000 on the previous quarter) and payrolled employment (down 136,000 on the month – though likely to be revised away somewhat) further suggest that while the workforce is expanding, firms’ appetite for workers is more mixed.

Public sector pay growth (5.6 per cent in cash terms) continued to catch up with private sector wage growth (7.0 per cent) – though both continue to shrink in real terms.

Hannah Slaughter, Senior Economist at the Resolution Foundation, said:

“Britain’s workforce continued to expand and normalise in the early 2023 – allaying fear that the pandemic had permanently shrunk the workforce. But older workers – a large cohort of whom took early retirement during the Covid crisis – remain inactive in greater numbers than pre-pandemic.

“But while the workforce is expanding, firms’ appetite for new workers is falling as vacancy levels continue to decline. How this affects unemployment and pay growth levels in the months ahead will be weighing on policy makers minds.

While pay packets continue to shrink in real terms, the strength of pay growth in both the public and private sector, combined with likely falls in inflation in the months ahead, suggests that real wage growth could return soon.”