U.K. Labor Market Feeds Inflation Pressure With Jump In Wages
U.K. wages grew more than expected in the quarter through September as companies added workers.
(Bloomberg) -- Britain’s job shortages showed no signs of easing in the third quarter as more people dropped out of work and wages grew at the fastest pace in over a year, adding to inflationary concerns for the Bank of England.
Both the number of employed and unemployed fell, while 108,000 more people became economically inactive in the three months to September. That took the total increase in those not seeking work since the start of the pandemic to 630,000.
The figures from the Office for National Statistics underline the case for the central bank to keep raising interest rates. Policy makers are seeking to head off a wage-price spiral after consumer prices jumped 10.1%, the most in four decades.
“Hiring appetite is undoubtedly past its peak, but there isn’t much sign that the acute labour shortages are easing,” said James Smith, developed markets economist at ING. “If we’re looking for signs that the bank is about to halt its tightening cycle, the jobs data probably isn’t the place to look.”
The labor market is continuing to tighten even though the economy is slipping into recession. That’s prompted companies to pay more to lure staff to fill vacancies.
The ONS revealed that despite strong growth in headline pay, real wages, after adjusting for inflation, shrank 2.6% -- the steepest decline since the recession in 2009.
What Bloomberg Economics Says ...
“The latest batch of jobs data will embolden hawks at the Bank of England. A slowing in the pace of tightening remains likely at the December meeting, but with the labor market still hot and rising wage growth keeping the risk of an unmooring of expectations high, any significant scale back is unlikely. A 50-basis point hike is our base case.”
--Ana Andrade, Bloomberg Economics. Click for the REACT.
Chancellor of the Exchequer Jeremy Hunt said fighting inflation is his “absolute priority” that will guide “the difficult decisions on tax and spending” he will announce at the autumn statement on Thursday, when he is expected to raise taxes and cut government spending.
“I appreciate that people’s hard-earned money isn’t going as far as it should,” Hunt said. “Restoring stability and getting debt falling is our only option to reduce inflation and limit interest rate rises.”
Britain has been grappling for over a year with chronic job shortages that have forced up pay and led to fears of a wage price spiral at the BOE. Its monetary policy committee has raised rates from 0.1% last December to 3% last week and is expected to increase them to 3.5% next month.
The squeeze has been fueled by the loss of over half a million workers in the past two years, largely due to long term sickness. Inactivity -- those neither in work nor looking for a job -- rose again to 21.6% of working-aged adults from July and September.
“Today’s numbers are consistent with the MPC raising interest rates again in December,” said Martin Beck, chief economic adviser to the EY ITEM Club. “But the committee may rein back the scale of increase from November’s 75 basis points to a more ‘conventional’ 50 bps or 25 bps rise.”
Although the ONS data suggested employers may have started to scale back hiring in the face of a looming recession, “the challenges in the labor market remain very much the same,” said Jane Gratton, head of people and policy at the British Chambers of Commerce.
“We have a critical shortage of skills and labor that is damaging firms and holding back growth.”
Staff shortages are pushing up pay, with average weekly earnings excluding bonuses up 5.7% from a year ago, the most since August 2021 and stronger than the 5.5% pace economists had expected.
For private sector workers, regular pay is growing at the fastest pace on record outside the pandemic, gaining 6.6%. Public sector pay grew 2.2%. The gap between the two is the biggest ever recorded, the ONS said.
That gap helps explain ongoing industrial action among public sector unions. Nurses are planning their first major strike in a century, civil servants are planning action and teachers are balloting on a strike next year.
Partly as a result of the increase in inactivity, unemployment fell by 69,000 in the three months to September compared with the previous period as fewer people sought to look for work.
The unemployment rate remained near four decade lows at 3.6%, slightly above forecasts for 3.5%. Employment fell by 52,000, as workers dropped out.
Despite concerns about high inactivity levels, Hunt said the employment numbers were “a testament to the resilience of the British economy even in the face of severe global challenges.”
The number of job vacancies fell for the fourth month running to 1.23 million in the quarter to October. That’s 46,000 fewer than in the May to July period but still means there’s at least one job for every person classed as unemployed.
There were other early signs of potential weakness in the figures. Redundancies rose 40% in the third quarter to 75,000. In September alone, employment dropped by 249,000, driving up unemployment by 0.4 percentage point to 3.8%.
The BOE expects unemployment to climb above 6% over the next three years. However, companies’ immediate response to the downturn may be to freeze hiring rather than actively cut jobs.
“There are already initial signs that the economic slowdown is starting to affect the labor market,” said Jake Finney, economist at PWC UK. “Though unemployment will rise, we do not expect that it will reach the same heights as during the global financial crisis.”
--With assistance from , , and .
(Updates with comment and details from statement from the first paragraph.)
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