Despite stable employment rates and low unemployment, this month’s labour market statistics give reason for concern, with the number of people who are out of work and not looking for work due to long term ill health reaching a record high and pay growth outpaced by inflation.

There are suggestions that Thursday’s budget will result in an uprating of the national minimum wage, Universal Credit and other benefits. However, this is unlikely to go far enough in supporting those who need it most over months ahead, and proposed tax freezes will reduce take-home pay for many households.

Number of people out of work and not looking for work due to long-term ill health continues to grow

There are now 2.5 million people out of work and not looking for work due to ill health: the highest number on record. This grew by 133,000 on the quarter, an increase of 5.6%.

This marks a continuation of a concerning trend that has emerged through the pandemic, with an increase of 465,000 people out of work through ill health compared with the same quarter in 2019. Long-term sickness now composes 28.0% of all those who are economically inactive, the highest proportion since inactivity records began in 1993.

Figure 1: Economic inactivity by reason, Jul-Sept 2012 – Jul-Sept 2022

Source: Work Foundation calculations based on ONS (15 November 2022) Dataset A01 November – Table 11 Economic inactivity for those aged from 16 to 64 (seasonally adjusted)

There may be many reasons why economic inactivity, or being out of work and not looking for work, can increase, some of which are more concerning for policymakers and employers than others.

Close to 1.2 million economically inactive people aged 16-64 have retired. Interestingly, this number appears to be declining, falling by 39,000 people this quarter. It is likely that rising living costs are at least partly responsible for this. A recent survey found that 6% of pensioners are likely to seek employment in the coming month to top up their pension pot or help pay the bills, with 12% saying that inflation had "upended" their retirement plans. Just over a third said that they were concerned about being able to sustain the lifestyle they most wanted.

Strong pay growth is being outpaced by inflation

Most shoppers will have noticed that the same budget doesn’t fill their shopping basket quite like it used to. This is driven by prices going up while the real value of pay has gone down. Although regular pay (excluding bonuses) rose by 5.7% this quarter, inflation wipes out these pay rises, meaning that pay has actually fallen in real-terms value by approximately 2.7%.

This overall nominal pay growth is largely driven by the private sector, which saw a 6.6% increase compared with just 2.2% in the public sector. This means that inflation, which was 10.1% in September, affects public sector workers more acutely, with the real value of their wages declining by over 7%. The TUC reports that on average in the private sector, workers will earn £17 less per week than they did last year, but this is as much as £48 less for public sector workers.

Figure 2: The pay growth divide between public and private sector widens

Source: Work Foundation calculations based on ONS (15 November 2022) Dataset A01 November – Table 15: average weekly earnings, regular pay.

Interestingly, we see that pay growth in wholesale, retail, hotels and restaurants was stronger than average at 7.3%. This is likely connected to labour shortages in these sectors which are driving up wages, as well as the start of seasonal hiring tin August which usually ramps up in the months before Christmas. Of course, despite this above average pay growth, inflation still on balance reduces the real value of those wages to below where they were last year. And as highlighted in our UK Insecure Work Index, the wider terms and conditions experienced by workers in these roles are often unfavourable, with 36% of workers in distribution, hotels and restaurants and other services experiencing severe insecurity.

Are we starting to see signs of a recession?

According to The Bank of England, a recession is looming. In fact, once the data has caught up, it’s quite likely to show that we are already living it. Although the number of vacancies remains higher than they were pre-pandemic, they are decreasing month by month, signalling that organisations are becoming more hesitant to hire in a challenging economic landscape. This, coupled with a recent uptick in redundancies (although still lower than in 2019) could signal that soon we may start to see the number of job seekers increasing, while opportunities diminish. The Bank of England has predicted that unemployment will increase to nearly 5% in 2023.

Heightened competition among jobseekers and fewer opportunities could mean that we may see a downward pressure on wages and conditions, and an increase in insecure work as we have often seen associated with challenging economic times in the past.

What will Thursday’s budget mean for workers?

Ahead of the announcements on Thursday, the media suggests that the Treasury may freeze, among others, income and national insurance tax. This would decrease take-home pay for most workers. Given the recent rise in the use of foodbanks as reported by the Trussell Trust, of which one in five users is a working household, further squeezes on household income may be dreaded by many. In effect, as ITV political editor Robert Peston said on 14 November, “everyone will be worse off”.

However, there are welcome signs that the Chancellor will protect those with lowest incomes by uprating the national minimum wage in line with inflation from £9.50 an hour to £10.40 an hour. This would be an important increase, but one that is expected to come in next April and that doesn’t offer much support over the coming challenging months. Furthermore, there are signs that indicate the Chancellor may uprate Universal Credit and other benefits in line with inflation, which would be an important step to prevent households from falling into poverty. However, as with the uprating of the national minimum wage, the uprating of benefits takes place in April and will leave households to bridge five challenging months.

The Government also needs to support a wider group of people to access and stay in work over the long-term, by creating a cross-agency Participation Taskforce to address the complex underlying health and social issues need to help support more people back into work. This should include widening eligibility for Department for Work and Pensions employment support to those who are not on Universal Credit.

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