Earnings growth has peaked. Living standards are rising even though demand for workers is cooling. Ministers have a big decision to make on next year’s state pension uprating.
Those were the three main conclusions to be drawn from a more limited report than usual on the state of the UK jobs market provided by the Office for National Statistics.
The ONS has delayed publication of its labour force survey – its preferred measure of trends in employment and unemployment – for a week because it has been having trouble getting people to respond to its inquiries about whether or not they are working.
Even so, data for earnings, vacancies and flash estimates of employment and pay culled from HMRC were released, and they contained a consistent message.
First, the 14 increases in interest rates that have taken official borrowing costs from 0.1% to 5.25% are having an effect. In the three months to August, total earnings – regular pay plus bonuses – were 8.1% higher than in the same three months of 2022. In the three months to July, the increase was 8.5%. For regular pay excluding bonuses, the fall was less marked – from 7.9% in the year to July to 7.8% in the year to August.
Second, upward pressure on pay is easing because there are fewer jobs on offer. The number of job vacancies dropped by 43,000 to 988,000 in the three months to September and was down by 256,000 over the year.
That fall has to be put into perspective, because there are still 187,000 more job vacancies than there were before the pandemic. That suggests that even if it has topped out, earnings growth will – in the absence of a full-blown recession – subside only gradually.
As a result, real earnings – the purchasing power of pay once prices are taken into account – should remain positive provided the recent downward trend in inflation continues. That is not guaranteed, since higher oil prices triggered by the war between Israel and Hamas could push up inflation over the coming months.
Finally, the government has to decide what to do about the triple lock, which specifies that the state pension should rise each year by whichever is highest of earnings, inflation or 2.5%.
The period over which the earnings component of the triple lock is calculated is the three months from May to July, when there was an increase of 8.5%. But earnings growth during that time was boosted by one-off payments to NHS staff and civil servants which, according to the ONS, led to “a spike in bonus payments that has never been seen before”.
Using regular growth in the three months to July would mean uprating pensions next year by 7.9% rather than 8.5% – and would save the exchequer about £1bn. It is safe to say that that option is under careful consideration.
