The UK unemployment rate stood at 3.7% in Q4 2022, according to figures released by the Office for National Statistics (ONS) on Tuesday morning. The unemployment rate was therefore up by 0.1 percentage points on Q3 levels. Compared to the pre-pandemic three-month period to February 2020, the unemployment rate was down by 0.2 percentage points.
Meanwhile, the latest figures show that the employment rate saw an uptick of 0.2 percentage points to 75.6% in Q4. Though, compared to before the pandemic, the share of the working age population in employment is down by 0.9 percentage points. The release also provides further evidence that job vacancies, while standing at historically high levels, have turned a corner. The number of vacancies fell for the third consecutive quarterly period in the three months to January 2023, of which the latest period saw the sharpest fall, at 76,000.
The simultaneous rise in the share of the labour force looking for work (unemployment rate) alongside an uptick in the proportion of the working age population in work (employment rate) is explained by an expansion in the size of the labour force itself (economic activity). Figures in today’s release show that the inactivity rate stood at 21.4% in Q4, down from 21.6% in Q3. Indeed, flow estimates from the ONS suggest that between Q3 and Q4, there was a “record-high net flow out of economic inactivity, driven by people moving from economic inactivity to employment”. This phenomenon could be attributed to the ongoing cost-of-living crisis in the UK, with many of the previously inactive feeling obliged to re-enter the labour market in order to keep up with the rising cost of essentials. Nonetheless, the share of the working age population sitting outside of the labour market still remains elevated, with the current reading up by 1.2 percentage points on pre-pandemic levels. Increased levels of economic inactivity pose a real threat to the economy. Higher inactivity reduces the pool of workers and skills available to the businesses looking to hire, thereby limiting the full potential to which businesses can expand and grow, hence hindering long-term economic growth. The severity of this is illustrated by the fact that the UK has the largest inactivity gap in the G7, with five of the seven countries having seen inactivity fall below pre-pandemic levels.
Despite falling in the three months to January, the number of unfilled vacancies remained high at 1.1 million. This, in conjunction with elevated levels of inactivity and inflation expectations, likely represents an important factor driving earnings growth in the UK. Today’s figures showed average regular pay (excluding bonuses) among employees rising by 6.7% on the year in Q4, up from 5.8% in Q3. Consequently, the reading for regular pay growth was the strongest seen outside of the pandemic period, while also beating market expectations of 6.5% growth.
However, in light of double-digit inflation readings, the rate of pay growth continues to be outstripped by that of consumer prices. As such, when adjusting for prices, total (including bonuses) and regular pay (excluding bonuses) were down by 3.1% and 2.5%, respectively, in Q4. This shortfall is leading to a squeeze in living standards, adding to expectations that the economy will fall into recession soon.
Today’s headline figures show unemployment rising, vacancies falling and real pay contracting. While the market remains tight, this release signals a departure from the record-breaking figures recorded earlier in 2022. Looking ahead, hiring intentions are expected to weaken further amid a difficult business environment, marred by higher input costs, tighter monetary conditions, and falling consumer demand.
Accordingly, economic activity is expected to be dampened in the quarters ahead, with our forecasts pointing to a 1.3% contraction of the UK economy. These factors are set to weigh on labour market activity, with Cebr expecting unemployment to rise gradually through 2023, peaking at 4.5% in Q3. In light of this gloomier outlook, a key growth-boosting priority for the Government in next month’s Budget should be to identify means of supporting and incentivising a return of economic inactivity to pre-pandemic levels.
Pushpin Singh is an economist at the CEBR.
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