Amid the challenges facing the economy, continued strength in the labour market remains one key positive. The jobless rate was at a near-50-year low in Q2 and job vacancies close to a historic high. But movements in both suggest the labour market is becoming a little less tight.
Statistical irregularities were the main reason behind a deceleration in pay growth in the latest data. On an underlying basis, the earnings numbers don't yet validate the Bank of England’s concerns of a potential wage-price spiral. Real pay has continued to fall, although, on the upside, this is expected to help to preserve jobs as the economy slows.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “The labour market continued to display resilience over the summer, albeit with signs that a weaker economy is loosening things up a little. The Labour Force Survey (LFS) jobless rate of 3.8% in Q2 was 0.1ppt higher than in the first quarter, but still lower than the immediate pre-Covid rate. Employment rose 160,000, but this did not prevent the employment rate falling 0.1ppt to 75.5%. Inactivity was broadly unchanged. Meanwhile, job vacancies fell for the first time since the summer of 2020, although they were still close to a record high.
“At first sight, a deceleration in headline (three-month average of the annual rate) pay growth to 5.1% in Q2 from 6.4% in May was consistent with labour market conditions becoming less tight. In practice, the slowdown largely reflected March's strong, bonus-driven, 9.9% single-month rise in earnings falling out of the three-month comparison. Excluding bonuses, headline pay was up 4.7% in Q2, an advance on May's 4.4%, but falling behind CPI inflation of 9.2% in the same period.
“The average worker continuing to see their pay fall in real terms is at odds with concerns about the possibility of a wage-price spiral in the UK. And while falling real pay will have an impact on consumer demand, labour getting cheaper relative to prices and the cost of some other inputs should protect employment from the negative effects of a weaker economy. So, while the EY ITEM Club expects GDP to grow slowly over the next 12 months, the jobless rate is expected to remain below 4.5% over that period – which would be a much softer outcome compared to past economic slowdowns.”