The resilience of Britain’s labour market has been a feature of the post-pandemic economic landscape, and that unexpectedly strong trend shows few signs of ending.
The 12 consecutive increases in interest rates that have taken borrowing costs from 0.1% to 4.5% since December 2021 are affecting house prices but they have yet to put much of a dent in demand for workers.
The latest data from the Office for National Statistics shows employment and total hours worked at record levels, a fall in inactivity and – most significant of all – a pickup in wage growth.
Part of the reason earnings growth picked up was because of April’s near-10% increase in the national minimum wage, but there was also evidence of rising wages in higher-paid sectors of the economy such as finance and business services.
All of this presents a headache for the Bank of England, which for months has been looking for clear signs that the labour market is softening so it can take its foot off the interest rate brake.
Yet over the three months to April, the economy generated an additional 250,000 jobs, a much higher figure than the 142,000 in the three months to March. Inactivity fell because more people were looking for – and finding – work.
Wage growth, including bonuses, in the latest three months was 6.5% higher than in the same period a year ago, compared with 6.1% in the three months ending in March. Pay growth excluding bonuses picked up to 7.2% from 6.8%.
Annual pay growth in the private sector rose and is running at 7.6%, not enough to keep pace with inflation but far higher than the Bank is comfortable with.
It is reasonably clear what is happening. Workers are seeking pay increases that will prevent their living standards from falling. People who previously were not looking for work are doing so in response to cost of living pressures on their household budgets. The avoidance of a recession over the winter has made companies reluctant to lose workers, even though many are still hiring only on a part-time basis.
There are some tentative signs that the labour market is softening, including another fall in the stock of job vacancies, but it will not be nearly enough to assuage fears on the Bank’s monetary policy committee that strong wage growth risks becoming entrenched.
Unemployment is traditionally a lagging indicator: a better guide to what has happened in the past than it is about the future. Swati Dhingra, one of the Bank of England’s interest-rate setters, made this point in a speech on Tuesday after the release of the jobs data, noting it would take time for previous rate increases to take effect.
The City sees things differently. The jobs figures are fanning fears that a wage-price spiral is taking hold, and the markets now think the Bank will need to push interest rates to 5.75% in order to bring inflation back to its 2% target.
That may prove unnecessary, because higher mortgage rates will slow the economy and do some of the Bank’s job for it. Even so, a 13th increase in interest rates is nailed on for next week, with the only question the size of the increase. The betting is on a 0.25% rise, but some MPC members will probably be arguing for a half-point jump.
