The UK’s unemployment rate has fallen to its lowest in nearly fifty years but workers are still suffering sharp falls in real income as wage growth lags behind soaring inflation.
Figures from the Office for National Statistics (ONS) showed that the country’s jobless rate dropped to 3.7 per cent from 3.8 per cent in the three months to March, the lowest since 1974 and better than economist expectations of no change in the first quarter.
In a further sign that businesses are struggling to recruit, the ONS said that the economy now had more open job vacancies than unemployed people for the first time since records began. The number of vacancies rose to a new record of 1.29 million in April.
Despite the tight labour market, most workers are still failing to secure wage increases in line with inflation, which hit 7 per cent in April and is due to climb to double-digits later this year. The ONS said a measure of weekly earnings growth, that strips out bonuses, rose 4.2 per cent in the first quarter. In real terms, adjusting for inflation, this resulted in a steep 1.2 per cent drop in earnings, the worst fall since 2013.
There is evidence that companies across different sectors are offering bonuses as a way to attract new talent. The ONS’s measure of weekly earnings growth including bonuses hit 7 per cent, accounting for lucrative annual payments made in the financial sector.
“Continued strong bonuses in some sectors such as construction and especially finance mean that total pay is continuing to grow faster than prices on average, but underlying regular earnings are now falling sharply in real terms,” Darren Morgan, director of statistics at the ONS, said.
Economists said the drop in unemployment could be attributed to further falls in the total size of the workforce following the pandemic. The ONS estimates that the size of the UK workforce is about 1 million smaller than if it had continued on pre-pandemic trends.
Pay growth has become a closely watched metric amid fears that rapidly rising inflation will feed into workers’ wage demands and embed higher prices into the economy. So far, however, there are few signs that higher wages are contributing to runaway inflation, Martin Beck, chief economic adviser to the EY Item Club, said.
“There’s still little evidence to suggest a wage-price spiral is developing,” Beck said. “With a weakening economy cooling demand for labour, the risk that rising price pressures result in ‘second round’ effects on inflation will continue to recede.”
The ONS said total employment remained below its pre-Covid peak as more workers have dropped out of the labour force after the pandemic. The employment rate rose 0.1 percentage points to 75.7 per cent.
The Bank of England expects the unemployment rate to fall further from its present lows before rising above 5 per cent in the coming years as a result of higher interest rates that will help to dampen demand in the economy.
The fall in unemployment in the first quarter came despite UK economic growth having slowed at the start of the year and registered a 0.1 per cent contraction in March.
Paul Dales, chief UK economist at Capital Economics, said the jobs market would continue to boom and wage pressures would increase despite the uncertain economic outlook. “We think the Bank of England will have to raise interest rates from 1 per cent to 3 per cent to contain this source of domestic inflationary pressure,” he said.
