UK labour market is changing as inflation squeezes real pay

Workforce has shrunk amid rising long-term sickness and it appears unemployment is growing again

Jeremy Hunt was frank in his response to the latest official figures for the state of the UK labour market. High inflation, the chancellor said, was eroding the value of pay cheques. People’s wages were not going as far as they should.

Hunt sought to pin the blame for a rising cost of living on Vladimir Putin, but while Russia’s invasion of Ukraine has certainly given inflation an unwelcome boost since early this year the picture is more complex than that.

In the decade after the end of the global financial crisis of 2007-09, the percentage of the population in work rose steadily and the percentage economically inactive fell. Employers had no problem filling vacancies and so had an advantage in wage negotiations. Annual earnings growth remained modest even as unemployment fell to levels not seen since the mid-1970s.

Then the pandemic came along. Inactivity started to rise again and, while still lower than it was a decade ago, it is up 1.4 percentage points on the level in the period before Covid-19 first surfaced in the UK in early 2020. The employment rate has moved in the opposite direction, dropping by 1.1 points.

An increase in the number of people long-term sick appears to be the main reason for the fall in the supply of labour. In the past, the trend has been most marked among workers aged over 50, but the Office for National Statistics said younger age groups were mainly responsible for the 0.2-point increase in inactivity in the three months to September. The shadow chancellor, Rachel Reeves, says longer NHS waiting lists – in excess of 7 million – are partly to blame.


A shrinking workforce meant firms struggled to fill the vacancies that became available as lockdown restrictions were lifted. Unions were able to negotiate higher pay because their bargaining power increased. But although growth in total pay – which includes bonuses – is rising at an annual rate of 6%, wages are still failing to keep up with prices. That is particularly true in the public sector, where pay is up by only just over 2% year on year.

Workers and employers have responded to the state of the labour market in different ways. Falling real pay has led to an increase in industrial disputes, with the number of days lost to strikes at its highest in more than a decade. Meanwhile, employers’ groups have been urging the government to ease migration rules to boost labour supply.

The moment for that may well be passing because the latest ONS data suggests the labour market is turning. Vacancies, while still high historically, have fallen for a fourth successive quarter; employment fell by more than 50,000 in the three months to September; and the unemployment rate rose slightly. Those trends are likely to continue over winter as policy tightening by both the Bank of England and the Treasury combines with rising energy bills and falling real incomes to slow the economy markedly.


Larry Elliott Economics editor

The GuardianTramp

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