16 May 2023
There were some signs that the labour market was starting to ease in March. But demand for labour remains strong and pay growth is still well above the level that the Monetary Policy Committee (MPC) will be comfortable with. That still leaves the door open to another rate hike in June.
Demand for labour still strong for now
Employment rose by a whopping 182,000 in the three months to March, its largest jump in almost a year, signalling that demand for labour is still extremely strong. However, looking at the employment data in more detail suggests it is not quite as strong as it appears at first glance.
First of all, the more timely estimate of payrolled employees for April 2023 showed a monthly fall of 136,000, the first drop since February 2021 and vacancies fell by another 55,000.
Even the brisk growth in employment in the three months to March was driven by a 181,000 rise in part-time positions, full-time positions were flat. This surge in part-time work is probably due to a large number of students getting part-time jobs due to the cost of living crisis. The number of people saying they are inactive (not working or looking for a job) because they are a student dropped by 95,000 over the quarter.
Indeed, the total number of inactive people fell on the quarter by 156,000. That’s the main reason why the unemployment rate was able to tick up to 3.9% despite the increase in employment. While falling inactivity is a good sign, students getting part-time jobs won’t be enough to materially ease the labour market when the number of people inactive due to sickness is still rising. Inactivity due to sickness rose by another 81,000 on the quarter taking the total number of people out sick to 2.74m, a record high. It will be extremely difficult for the economy to return to growth and the labour market to ease to more comfortable levels without stemming the flow of sick people into inactivity.
Pay growth slowing but still far too high for the MPC
Whole-economy wage growth including bonuses was unchanged at an elevated 5.8% in the three months to March, although the single month measure did drop sharply from 6.7% in February to 4.9% in March.
More importantly for the Bank of England (BoE) average private sector wages excluding bonuses were steady at 7.0% in the three months to March. This is lower than the 7.3% growth registered in Q4 last year, but its still well above the 3%-3.5% consistent with the BoE’s 2% inflation target.
Overall, today’s data suggests the labour market is not easing quickly enough for the MPC to be comfortable – that leaves the door open to another rate hike in June. If the labour market remains stubbornly tight, interest rates might have to go even higher. But without solving the growing structural problems related to sickness, the UK will continue to underperform.