On the surface, Britain’s labour market looks healthy. The number of payrolled employees rose by more than 100,000 in November while annual pay growth is above 6%.
Look a bit more closely and there are signs – admittedly only small signs – that a turning point has been reached. Unemployment in the three months to October rose slightly to 3.7%, while job vacancies over the same period were down by 65,000.
Demand for jobs is holding up better than most economists have been predicting. The 107,000 increase in payrolls last month was more than double the 42,000 expected, for example.
Piecing together what is happening is not easy. The 417,000 days lost to industrial action in October is consistent with workers responding to the rise in inflation to a 40-year high of 11.1% by taking advantage of a tight labour market in pay negotiations.
The idea that the UK is taking a trip back to the 1970s doesn’t fit the facts, however. That’s not just because the number of days lost to strikes remains modest in comparison with the 1970s and 80s, it is also because pay increases are lagging well behind price increases. In the three months to October, both regular and total pay were down by 2.7% on a year earlier once inflation was taken into account.
The headline figure masks a big difference between the public and private sectors. In the public sector, where employers have only limited flexibility because of the hardline stance being adopted by ministers, earnings growth is running at 2.7%. In the private sector, where employers have more flexibility, it stands at 6.9%. It is no great surprise that industrial action has been concentrated in the public sector, or that hospitals are having difficulty holding on to staff.
The 76,000 drop in inactivity in the three months to October is an indication that people are starting to look for work because they are having trouble making ends meet. The increase in labour supply at a time when labour demand is softening means pay growth is at – or close to – its peak.
There are two reasons for that. The first is that inflation is likely to start heading back down and will fall fast next year. The second is that the latest labour market data will do nothing to dissuade the Bank of England’s monetary policy committee from raising interest rates again on Thursday. The Bank is prepared for unemployment to rise to bring inflation back to target. That process has only just begun.