Record rise in long-term ill health fuels tightest labour market in at least 50 years

The UK employment rate for May to July 2022 for people aged 16 to 64 years decreased by 0.2 percentage points on the quarter to 75.4% and is still below pre-coronavirus (COVID-19) pandemic levels. Full-time employees and self-employed workers increased over the latest three-month period, while part-time employees decreased.  

Read in more depth here.

Main points

The most timely estimate of payrolled employees for August 2022 shows a monthly increase, up 71,000 on the revised July 2022 figures, to a record 29.7 million.

The unemployment rate for May to July 2022 decreased by 0.2 percentage points on the quarter to 3.6%, the lowest rate since May to July 1974. In the latest three-month period, the number of people unemployed for up to six months decreased to a record low, and those unemployed between 6 and 12 months increased. Meanwhile, the number of people unemployed for over 12 months continued to decrease.

The economic inactivity rate increased by 0.4 percentage points on the quarter to 21.7% in May to July 2022. This increase in the latest three month period was largely driven by those aged 16 to 24 years and those aged 50 to 64 years. Looking at economic inactivity by reason, the increase during the latest three-month period was driven by those inactive because they are students or long-term sick.

The number of job vacancies in June to August 2022 was 1,266,000, a decrease of 34,000 from the previous quarter and the largest quarterly fall since June to August 2020.

The total number of Workforce Jobs in the UK in June 2022 rose by 290,000 on the quarter to a record 35.8 million, and for the first time exceeds the pre-coronavirus level of December 2019.

Growth in employees’ average total pay (including bonuses) was 5.5% and growth in regular pay (excluding bonuses) was 5.2% in May to July 2022. In real terms (adjusted for inflation), over the year, total pay fell by 2.6% and regular pay fell by 2.8%. Average regular pay growth for the private sector was 6.0% in May to July 2022, and 2.0% for the public sector; outside of the height of the coronavirus pandemic period, this is the largest difference we have seen between the private sector and public sector.

The Resolution Foundation’s Analysis

Britain recorded its sharpest real pay fall since 1977 this summer. But with nominal pay growth strengthening and the Energy Price Guarantee set to reduce inflation by around four percentage points relative to what it might otherwise have been, the depth of Britain’s pay squeeze may bottom out this autumn, the Resolution Foundation said today (Tuesday) in response to the latest ONS labour market statistics.

The labour market remains tight with unemployment falling to 3.6 per cent and nominal regular pay growth strengthening to 5.2 per cent in the three months to July. However, with CPIH inflation hitting 8.3 per cent over this period, real regular pay fell by 2.8 per cent – close to its sharpest fall since 1977.

However, the Foundation notes that while the outlook for inflation remains highly uncertain, the Energy Price Guarantee could prevent a second inflation spike this winter, taking around four percentage points off inflation relative to what it could have been.

Were inflation to remain at around its current rate of just over 10 per cent, real wages in Britain are unlikely to fall any faster than they are now, though they are likely to keep falling for another year – by which time around 20 years pay growth will have been wiped out.

There are further signs that wider economic turmoil is beginning to affect the jobs market – with a falling employment rate, falling vacancies and now redundancies bottoming out as signs that labour demand has started to fall as the economy plateaus.

Worryingly, the cost of living crisis has yet to encourage people back into the workforce. The inactivity rate has fallen again this month, driven by the long-term sick and students.

IES Analysis

Today’s figures are overall very poor, with employment down, ‘economic inactivity’ up (the measure of those out of work and not looking and/ or available for work) and real-terms pay falling. Of most concern today, economic inactivity due to long-term ill health saw its largest quarterly rise since comparable records began in 1992, reaching its highest ever level (2.46 million).

These falls in employment and participation are again coming in spite of unemployment plumbing new depths – now at its lowest since 1974 – and continued strong labour demand, leading to the tightest labour market in our lifetimes. Employers simply cannot find the workers that they need to fill their jobs. This in turn does appear to be feeding through into higher nominal pay, which is up by 5.4% year-on-year with private sector pay higher still (on average 6.4%). This at least means that the costs of living crisis is not as bad as it could have been for private sector workers, although in the public sector pay growth is anaemic at just 2.4% – well below its long run trend.

There are also some potential early signs that labour demand may be starting to weaken in the private sector as the combined effect of rising interest rates and higher inflation take their toll, although public sector vacancies continue to rise – likely due to their difficulties in recruiting and retaining staff without significant investment in pay and workforces.

All told, these figures reiterate that we need to do far more – public policy and employers – to help those out of work and who want a job to prepare for, find and stay in work. In particular this should mean broadening access to employment services – whether on any benefit or none; investing more in specialist support, drawing on the public, private and voluntary sectors; and working far better with employers on job design, recruitment, training and workplace support.

Sector Response

Stephen Evans, Chief Executive of Learning and Work Institute, said:

“Real wages continued to fall sharply, driven by high inflation. Capping energy prices at £2,500 per year for an average household will help. But further support is likely to needed for households with the lowest incomes, who tend to spend the highest proportions of their incomes on essentials like energy.

“The labour market is showing signs of flattening, with the employment rate down and economic inactivity rate up, particularly due to rises in the number people with long-term health problems leaving the labour market. There are still 300,000 fewer people in work than before the pandemic, again highlighting the need to extend support to find work to all those that want a job, which is currently restricted mostly to those who are unemployed and on benefits. That should form a key part of any plan for growth.”

Tony Wilson, Director at the Institute for Employment Studies said:

“Today’s figures should be sounding alarm bells in government, with the number of people out of work due to long-term ill health now rising faster than at any point in at least three decades.  This is happening despite there being well over a million vacancies in the economy and unemployment at its lowest in most of our lifetimes.  Yet there are still more than half a million more people out of work than there were before the pandemic began and firms simply can’t find the workers to fill their jobs.  This is holding back growth but also pushing up inflation, with pay growth in the private sector now running above 6% and contributing to even higher prices. Of course inflation is even higher still, which combined with anaemic public sector pay means that earnings in real terms have fallen for the ninth month in a row.

“This weak jobs recovery is being driven by more people out of work due to long-term ill health, up by 350 thousand since the pandemic and by 130 thousand in the last three months alone.  NHS waiting lists, poor mental health, a lack of specialist employment support and long covid will all be playing a part in this, but whatever the reasons we need to do far more to help those with ill health to prepare for, find and keep work.

For a government that wants to cut taxes to boost growth, today’s figures also spell trouble.  If we don’t do more to help more people into work, then any tax cuts will just lead to even higher inflation and higher interest rates for longer.”

Ben Harrison, Director of the Work Foundation at Lancaster University, a leading think tank for improving work in the UK:

“Today’s figures are a reminder that the Government’s Energy Price Guarantee alone won’t end the cost of living crisis. Real wages are 2.8% lower on the year, and we are seeing a significantly widening gap between regular private sector pay growth (6.0%) and that in the public sector (2.0%).

“And although today’s data suggests unemployment is now at a record low at 3.6%, there will be anxiety for those workers in industries vulnerable to soaring energy prices as the six-month employer support package fails to provide longer term security. It is vital that when the Chancellor delivers his Budget in the coming weeks he provides more clarity on how these sectors can be supported, and how the Government intends to restore the UK economy to growth.”

TUC General Secretary Frances O’Grady said:  

“Every worker deserves a decent standard of living.

“But as the cost-of-living crisis intensifies, millions of families don’t know how they will make ends meet this winter.

“The new prime minister must get pay rising. Boosting the minimum wage and giving public sector workers a decent pay rise would be a good start.

“And unions should be allowed to go into every workplace to negotiate proper pay rises for all working people.” 

Gregory Thwaites, Research Director at the Resolution Foundation, said:

“Pay settlements strengthened over the summer, but not by enough to keep up with rapidly rising inflation. As a result, pay packets have kept shrinking at close to their fastest rate since 1977. The only chink of light is that a more benign outlook for inflation means that they might not shrink any faster, although they won’t grow for another year.

“Wider economic turmoil also looks to be affecting the jobs market. Instead of the cost-of-living crisis tempting people back into work, more people are exiting the jobs market altogether, primarily due to poor health reasons.”

Jack Kennedy, UK economist at the global job site Indeed, commented:

“We’re now starting to see signs of a labour market losing its momentum with declines in employment and vacancies in the latest figures. 

“At the same time, there remains extreme tightness with vacancies nonetheless remaining near record levels and economic inactivity reversing its recent falls to rise to its highest level since 2016. This was caused by people at opposite ends of the career ladder; largely driven by those aged 16 to 24 years and those aged 50 to 64 years. This participation gap in the labour market means hiring became even more challenging for employers. 

“While many people’s thoughts may be elsewhere at the moment, the cost-of-living crisis continues to be reflected in a squeeze on real terms pay. Despite historically strong nominal regular pay growth, real wages were down -2.8% on the year – one of the largest falls on record. 

“The squeeze on public sector workers is particularly acute as their regular wages increased by just 2% year-on-year in nominal terms compared with 6% for private sector workers, the largest gap on record outside of the pandemic period.”