“Sluggish” labour market could stunt long-term growth

"Unless we can better tackle inactivity, the UK will not grow as it could," said REC chief executive Neil Carberry

Employment decreased while real wage growth increased in the last quarter, the latest labour market data from the Office of National Statistics has shown.

James Cockett, labour market economist for the CIPD, told HR magazine that the increased wage growth would mean that employers have the upper hand in salary negotiations.

He said: “Pay growth remains stubbornly high as workers continue to demand higher wages to offset the cost of living. This is despite indicators of a slowing jobs market, depicted by slowly rising unemployment and falling vacancies.

"As inflationary pressures subside, employees are in a weaker position to negotiate salaries in 2024. Instead, it will be employers who are more likely to dictate the direction of travel towards lower pay growth."

Read more: ‘Iceberg’ labour market continues to cool

The employment rate decreased from January to March 2024 to an estimated 74.5%, below estimates of a year ago. Meanwhile, the unemployment rate increased to an estimated 4.3%.

Neil Carberry, chief executive of the Recruitment and Employment Confederation, explained that the decline in employment was due to economic recession.

He said: “The labour market tends to lag the economy, so today’s sluggish data reflects the recession we had over the winter. Business surveys, including our own Report on Jobs, suggest a turn in activity is coming across the summer following the recent return to growth.”

Annual growth in employees’ average regular earnings (excluding bonuses) was 6.0% in January to March 2024.

Annual growth in real terms (adjusted for inflation) for regular pay was 2.0% in January to March 2024. For total pay, the proportion was 1.7%. 

Between February and April 2024, vacancies decreased by 26,000 to 898,000. Vacancies decreased on the quarter for the 22nd consecutive period but were still above pre-Covid-19-pandemic levels.

Carberry added that while the market remained strong, it was not set up for long-term growth.

He continued: “That said, the UK jobs market has remained remarkably robust in terms of low unemployment and high employment despite the recession. On the surface, this is good news.

“But as we return to growth it could be a problem. Unless we can better tackle inactivity, including long-term health issues, and find ways to be more productive with technology and skills, the UK will not grow as it could.”

Read more: The solution to the UK's productivity problem is in HR's hands, Part 1

Economic inactivity for people aged 16 to 24 continued to rise to 22.1% in April, up on the previous quarter and above the estimates reported a year ago.

The number of people who claimed benefits due to unemployment increased by 8,900 in April 2024, up by 29,300 on the year, to 1.579 million.

Jack Kennedy, senior economist for the recruitment firm Indeed, said that this demonstrated a strained labour market.

"The latest figures show that inactivity remains a significant constraint on labour supply with over 800,000 more working-age people outside the labour force than before the Covid-19 pandemic. Long-term sickness remains near a record-high at 2.8 million," he commented.

Michael Stull, managing director of the recruitment firm Manpower Group, explained that the talent shortage could stunt productivity in the long run.

He said: “In the battle for talent, wage rises are stubbornly high and worrisome given the current lower levels of inflation and productivity levels, with wages in some cases being further inflated for certain roles and sectors because of competitive skills requirements. 

“While productivity levels across the UK remain low, even with inflation coming down and a much-anticipated interest rate cut expected later this year, the road to further economic growth and competitiveness remains rocky.”

A report by the Resolution Foundation on 13 May showed that real wage growth had outgrown workers’ productivity.