There has been increasing concern with regard to the UK labour market since the October Budget. The government increased national insurance as well as the minimum wage, both of which will cause a substantial rise in employment costs. In addition to that, ministers are pushing for changes in workers’ rights.
Surveys carried out since the Budget show a dismal picture of the labour market. According to the Purchasing Managers’ Index (PMI), private sector firms have reduced staff at the fastest pace since 2008 over the past couple of months, excluding the covid period.
A policymaker at the Bank of England, Catherine Mann, drew attention to the risks of ‘nonlinear’ adjustments in the labour market – by which she meant the risk of growing unemployment – as a justification for her big rate cut.
However, the latest official figures are slightly more encouraging. “The hard numbers on the jobs market currently don’t look so bad,” James Smith, developed market economist at ING said.
Unemployment remained steady at 4.4pc, whereas economists had expected it to increase to 4.5pc. These figures should be taken with a pinch of salt, given the ONS’s well- publicised difficulties with low response rates. Still, a swathe of other indicators painted a similar picture.
According to a flash estimate, the number of pay-rolled employees rose by 21,000 in January, surprising analysts who had expected a fall. This is an early estimate, so it is liable to substantial revision, but the previous trend is to be revised higher. For example, December’s ‘flash’ estimate suggested that the number of pay-rolled employees fell by 47,000, but this was revised up to a decrease of 14,000.
“The upward revision to December payrolls and January’s small rise should be the focus today because they show that employment has stalled rather than collapsed,” said Rob Wood, chief UK economist at Pantheon Macroeconomics.
This means payrolled employment has grown by 49,000, or about 0.2pc over the year. This is not good, but a “stalled” jobs market is better than a “collapsed” one. It also suggests that the dire business surveys at the end of last year exaggerated the labour market downturn.
There’s a similar story on vacancies. The number of job vacancies fell in the three months to January, extending the run of consecutive decreases to 31 rolling quarters. However, vacancies have increased slightly in each of the last two months, suggesting that the extended post-pandemic slump might be bottoming out.
“The labour market is creaking but not cracking,” Sanjay Raja, chief UK economist at Deutsche Bank said. “Some slack is emerging, but we aren’t seeing a worrying spiral in unemployment – just yet.” The key question is: Is it just a matter of time before the labour market cracks under the pressure of the Budget cost increases, which will only come through in April? Surveys suggest the answer might be yes. A study from the Chartered Institute of Personnel and Development indicated that a quarter of firms have been planning job cuts for the next quarter, the highest level in ten years excluding the pandemic. Analysts at Nomura said it was “only a matter of time before this shows up more clearly in the official data.” But there’s some cause for hope. After all, the surveys have been overstating the downturn for the past five months. There’s no particular reason to think they’ll get more accurate. The figures suggest firms want to “keep staff levels high where possible,” Elizabeth Martins, senior UK economist at HSBC said, which would limit the potential downside.
The continuation of strong wage growth in what is still a relatively weak labour market points to continuing demand for the right workers too. Looking over a range of shocks in the past few years, the labour market has performed remarkably well. Early indicators suggest it can withstand the Budget too. (The writer is our foreign correspondent based in the UK)
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