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On the surface, Britain’s labor market looks healthy. The number of salaried employees increased by more than 100,000 in November while annual wage growth was more than 6%.
Look a little more closely and there are signs – admittedly only small signs – that a turning point has been reached. Unemployment rose slightly to 3.7% in the three months to October, while job vacancies fell by 65,000 over the same period.
Demand for jobs has been better than most economists were predicting. For example, payrolls rose by 107,000 last month, more than double the expected 42,000.
It’s not easy to piece together what’s going on. The 417,000 days workers lost in industrial action in October have responded to inflation at a 40-year high of 11.1%, taking advantage of a tight labor market in pay negotiations.
However, the idea that the UK is returning to the 1970s does not fit the facts. That’s not just because the number of days lost to strikes remains modest compared to the 1970s and ’80s, it’s also because wage increases have lagged far behind price increases. In the three months to October, regular and total wages fell by 2.7% when adjusted for inflation from a year earlier.
The headline figure masks a large gap between the public and private sectors. In the public sector, where employers have only limited flexibility due to the rigid stance adopted by ministers, earnings growth is running at 2.7%. In the private sector, where employers have more flexibility, it is 6.9%. It is not surprising that industrial action has been concentrated in the public sector, or that hospitals are finding it difficult to retain staff.
The 76,000 drop in unemployment in the three months to October is a sign that people are starting to look for work because they are having trouble making ends meet. An increase in labor supply at a time when labor demand is softening means wage growth is at its peak – or close to it.
There are two reasons for that. The first is that inflation should start to come back down and fall sharply next year. Another is that the latest labor market data will do nothing to discourage the Bank of England’s Monetary Policy Committee from raising interest rates again on Thursday. The Bank is prepared for rising unemployment to bring inflation back to target. That process has just begun.
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