The UK unemployment rate stood at 3.7% in the three months to January, according to figures released by the Office for National Statistics (ONS) this morning. This was unchanged on the previous three-month period, ending in October. Indeed, the unemployment rate has remained constant for each of the last four readings. This measure is currently down by 0.3 percentage points on pre-pandemic levels. Meanwhile, the employment rate was up by 0.1 percentage point on the previous three-month period, reaching 75.7%, and was down by 0.8 percentage points on its pre-pandemic level.

A feature of the UK labour market since the onset of the Covid-19 pandemic has been an elevated inactivity rate. Having stood at 20.2% in the three months to February 2020, this metric witnessed a stark upward trend, reaching 21.7% in the three months to August 2022. Since then, however, the beginning of a gradual decline has been witnessed, which continued in the latest data. The inactivity rate stood at 21.3% in the three months to January, down by 0.2 percentage points on the quarter. This continued decline was predominantly driven by younger people, particularly students entering the labour market. There remain significant numbers of inactive individuals, however, with people classed as long-term sick making up the largest share. Given that this elevated rate of economic inactivity constrains labour supply, it can be seen as one reason behind the UK’s weak growth performance at present. The Chancellor is expected to announce measures to deal with this issue at Wednesday’s Budget.

This morning’s ONS bulletin also covered earnings data. It was shown that nominal total pay grew by 5.7% annually in the three months to January, while nominal regular pay increased by 6.5% on the year. Total pay growth was down by 0.5 percentage points on the previous three-month period, while regular pay growth was up by 0.4 percentage points. Both of these figures remain firmly above historic averages, with this being a function of the continually elevated inflation environment. With price growth reaching multi-decade highs, workers have been seeking larger pay rises to minimise the extent to which their spending power is eroded. The general tightness of the labour market has also helped in this regard, improving workers’ bargaining power, all else equal. Despite the high rates of pay growth in nominal terms, real pay remains in contractionary territory, given that price growth is still exceeding wage growth. Real total pay declined by 3.2% annually in the three months to January, marking the worst performance on this metric since April 2009. A key policy change from the Chancellor’s Autumn Statement was the uprating of the National Living Wage to account for recent price pressures. This will come into force from April and so will contribute to pay data in upcoming releases, driving the rates of growth upwards. Though not completely off the cards, further measures to support earnings are unlikely at tomorrow’s Budget, with the Chancellor instead more likely to implement support measures for households aimed at reducing their exposure to inflation.

Despite the unemployment rate remaining constant on the last four readings, Cebr expects this to change in the coming months, with the rate set to increase. This is as a result of the expected recession, which is forecasted across the first two quarters of 2023. The weaker business activity amidst the recession will reduce employers’ ability to maintain their staffing levels and is therefore likely to put upward pressure on redundancies. Initial evidence of this is already beginning to emerge. The redundancy rate stood at 3.3 per 1,000 employees on the latest data, up from a near-term low of 1.8 per 1,000 employees in the three months to May. Meanwhile, hiring intentions are slowing, with the number of vacancies having fallen by 51,000 on the quarter on the latest reading. Ultimately, Cebr expects the unemployment rate to rise in 2023, reaching a peak rate of 4.4% in the third quarter.

Sam Miley is Senior Economist at the Centre for Economics and Business Research.

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