Cooling UK Job Market Raises Concerns for Bank of England

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By Lydia Amazouz Published on April 16, 2024 13:35
UK Job Market - Word "Jobs" Put in Bold Under Magnifying Glass on a Newspaper

According to data released on Tuesday, the UK job market lost a little more of its inflationary heat, which gave the Bank of England some respite. However, persistent underlying issues remained with pay growth remaining strong and the rate of unemployment rising.

UK Labor Market Dynamics: Wage Growth Eases Amidst Rising Unemployment

According to data from the Office for National Statistics, core salaries increased in the three months leading up to February by the least since mid-2022 but were still high by historical standards.

Regular wages, excluding bonuses, increased by 6.0% from the same period last year to January. This growth was only somewhat less than the 6.1% increase from November to January, which the BoE is keeping an eye on as it decides when to start lowering interest rates.
Economists surveyed by Reuters had predicted a more severe drop to 5.8%.

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The unemployment rate unexpectedly increased from 3.9% to 4.2%, indicating a slowdown in the labour market. However, the ONS stated that the rate was volatile and that it was still undergoing survey reform.

Chief economist Yael Selfin of KPMG UK noted that the labour market was creating less inflation as seen by the increase in the unemployment rate and the most recent deceleration of wage pressure.

"The slight easing in regular pay growth will bring some comfort for the Bank of England which has relied on the pay data as a key gauge of domestic inflationary pressure," Selfin stated.

Growth in overall earnings remained constant at 5.6%, including increasingly volatile bonus payouts. There has been a minor slowing to 5.5% according to the Reuters survey.

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Strong pay rises have relieved some of the pressure on household finances that were impacted by the 2022 inflation spike, giving Prime Minister Rishi Sunak, who is facing low opinion poll numbers ahead of this year's election, some hope.

The most significant yearly gain since mid-2021, regular pay adjusted for the consumer price index increased by 2.1% in the three months leading up to February, according to data released on Tuesday.

Challenges Mount as UK Job Market Cools

The rate of unemployment, which gauges individuals who are neither employed nor looking for work and which the Bank of England wants to decline in order to relieve pressure on wages and inflation, reached a record high of 22.2% in mid-2015.

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At 2.83 million, the number of people listed as long-term sick reached a record high since records first started in 1993.

"The UK's labour market looks increasingly two-speed. Unemployment is rising and inactivity persists," Matthew Percival, the Confederation of British Industry's future of work & skills director, stated.

"Meanwhile there remain a heightened number of jobs that employers can't fill, causing pay to rise faster than compatible with significantly cutting interest rates."

For a twenty-first consecutive month, the number of vacancies decreased in the three months leading up to March. This was a 13,000 decrease from October to December and a 204,000 decrease from 916,000 a year earlier. However, they were still 120,000 over their pre-COVID amount.

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"The labour market continues to gradually cool but continued high wage growth underlines concerns over inflation persistence," Jack Kennedy, senior economist at jobs platform Indeed, stated.

"With stubborn US inflation having dimmed hopes of an imminent Fed rate cut, prospects for UK rate cuts being cut before autumn also look questionable."

Earlier this month, the minimum wage in Britain for workers aged 21 and over increased by nearly 10% to 11.44 pounds ($14.23) per hour. Some firms claim they are under pressure to raise prices or cut down on employment as a result of significant increases in recent years, which are largely reflective of the spike in inflation.

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The Recruitment and Employment Confederation announced last week that March saw a decline in the need for employees for the sixth consecutive month.

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