What’s the Economic and Labour Market Context for Q4?

It is clear that a whole range of factors (some global, some UK-specific) have contributed to a somewhat volatile and vulnerable economic context, which in turn has impacted the labour market. Figures released in mid-November by the Office for National Statistics (ONS) show CPI at 11.1% with CPIH (the Government’s preferred measure, which includes housing costs) at 9.6%. RPI (no longer widely used by the Government) sits at 14.2%.

Salaries and the state of the labour market

According to the Bank of England’s (BoE) latest Monetary Policy Report (November 2022), this should represent the inflationary peak, with CPIH falling to 10% in Q1 2023, and falling sharply from the middle of next year. To counter this inflationary spiral, the BoE has raised interest rates to 3.0% (with another announcement due 15th December).

These inflationary figures are lower than the BoE was forecasting in its previous quarterly report (August), with both the Energy Price Cap (EPC) and rise in interest rates having some effect on the upward trajectory of inflation. However, although the introduction of the EPC will reduce household energy bills, the increase in interest rates means that mortgage payments are noticeably higher for many employees.

The combination of higher energy bills (even with the EPC), higher food bills and higher mortgage payments all exert meaningful negative pressures on individual income. The question, therefore, is to what extent these are being offset by increases in earnings?

Before we answer this, it is worth looking first at the state of the labour market. We know that unemployment is at an almost record low of 3.7%, and that job vacancies remain at an almost record high. Although the unemployment rate has increased by 0.1% and job vacancies have decreased marginally over the last couple of months, there are still more available jobs than people unemployed.

We also know that an unusually large number of people have exited the labour market (i.e., are no longer seeking employment) post-Covid. This is as a result of a combination of the following:

  • Higher number of people choosing to study
  • More people with long-term ill health problems
  • Higher levels of early retirement
  • Lower inward migration following Brexit

Tight labour, generous wages

In other words, there are a large number of vacant roles and fewer people available to fill those roles, leading to a tight labour market, which in turn is leading to recruitment difficulties for many organisations.

This is a classic scenario in which one might expect to see rising wages. And it is true that to some extent pay is rising more quickly than it has done for many years.

Average Weekly Earnings (AWE) excluding bonuses rose by 6.1% for the 12 months to November (for both regular and total pay, including bonuses) and this has been creeping upwards over the course of the year, from 3.8% in February 2022. As always, these headline figures disguise consideration variations: AWE for the private sector rose by 6.9% (and 7.0% for Finance and Business Services), but only 2.7% in the public sector, which represents the largest gap ever recorded by the ONS.

AWE represents all changes in salaries (not just pay rises), so the data also pulls in individuals changing to higher paid roles, as well as changes in the composition of the workforce (i.e., fewer lower paid jobs in the economy would show up as increased growth in AWE). However, the continuously steady upwards trend over the course of 2022 is indicative of employer responses to a tight labour market and difficult recruitment conditions. In other words, employers have sometimes had to pay more to attract the right talent at the right time.

We have seen this over the year as market hot spots have arisen, specifically in areas such as IT, Digital and Transformation roles – all of these represent tactical employer responses to recruitment difficulties, rather than wholesale pay rises. We have also seen noticeable increases in pay at the bottom of the labour market, as a result in increases to both the National Minimum and National Living Wages.

Economic and Labour Market Context

London falling

Looking more specifically at pay rises, the BoE’s survey of businesses expects private sector pay rises to be in the region of 5-7%; whereas the CIPD’s survey of employer intentions has a median of 4% across the economy as a whole, and a figure of 5% for the private sector.
Salaries and the state of the labour market

These figures are slightly lower than we might have expected a couple of months ago, given the trajectory of inflation and this represents employer caution in the face of an expected recession during 2023. The BoE’s survey of business reports increased caution in hiring, with many respondents pausing their hiring. If this continues to be the case, we would expect to see a cooling down of the labour market in 2023, accompanied by an increase in unemployment.

It’s also worth considering the labour market in London. When we look at data from recruitment advertisements (from our Payography database) over the course of the year, we can see that the value of all roles advertised nationally rose by 5.3% over the past twelve months. However, when we look at a sample of 20,000 job adverts from London, we see a decrease in salaries of 14% from the start of 2022 to the present time. The decrease is more marked for more senior roles (with more junior roles holding their value).

This is interesting as the London labour market often runs a little ahead of the rest of the UK, and suggests that it has been cooling down from the feverish activity at the start of the year. This is not to suggest the employers are giving employees pay cuts, but that are finding that they can recruit candidates for a lower price than they could twelve months previously.

It’s also possible that this may represent the start of a longer-term trend towards London salaries cooling, as hybrid and/or remote working means that historically London-based employers fish in more remote (cheaper) geographical pools for labour.