- With indicators of labour market tightness remaining elevated at the start of this year, a rise in Bank Rate in March's MPC meeting is looking even more likely. Job vacancies climbed to a new record high, inactivity remained well above pre-Covid levels and the Labour Force Survey (LFS) jobless rate fell to 3.9%.
- Looking ahead, the drag on economic activity from rising inflation and increased uncertainty may weigh on job creation. But the experience of the 2010s suggests that the jobs market will adjust to a less strong economy via falling real wages more than declining employment.
Martin Beck, chief economic advisor to the EY ITEM Club, says:
“As far as measures of labour market tightness go, the latest jobs numbers show warning signs in several respects. Having been on an upward trajectory throughout last year, job vacancies climbed further to a new record high of 1.3m in the three months to February. Although employment broadly stagnated in the three months to January, compared with the previous quarter, growth in inactivity meant the LFS jobless rate still fell to 3.9% from 4.1% over the same period, taking it below the immediate pre-COVID-19 rate in early 2020. And the ratio of unemployed people per job vacancy fell to 1.0, the lowest since records began over 50 years ago.
“The MPC's worry will be that a tight jobs market risks inflationary second-round effects, as workers seek to offset cost of living pressures by asking for higher wages. This means it's now even likelier that the committee will raise interest rates on Thursday. But the extent to which strong demand for workers is feeding into pay growth is still not clear. Headline (three-month average of the annual rate) growth in regular pay in January was 3.8%, little changed from December's 3.7%, while total pay rose 4.8%, up from 4.6%. But a rise in the number of jobs furloughed a year earlier will have boosted year-on-year pay growth. And other evidence – for example, the Bank of England's survey of the public's earnings expectations – show no sign of a wage-price spiral.
“Moreover, a weaker economic outlook will affect the labour market. And going by the experience of the 2010s, adjusting to softer demand is likely to come through falling real pay more than job losses.”