Over the past year, we have seen the labour market slowly recovering from the economic impacts and wider societal changes brought by the pandemic. According to the December labour market statistics, employment, unemployment and economic inactivity are all broadly stable across August-October. However, with short-term unemployment and redundancies increasing while vacancies fall, signs of economic slowdown are starting to emerge which paint a grim picture for what is likely to come in 2023.

To know where we are going over the next 12 months, it is useful to look back over the past year. It may feel like it all happened much longer ago, but in August-October 2021, the furlough scheme was coming to an end, the economy had only just reopened, and we were still yet to feel the effects of the large-scale outbreak of Covid-19 that was in the making for December 2021. Given the uncertainty over this period of time, unemployment has remained remarkably low, although we must temper this with the consideration that many more people are still out of work, and not looking for work than prior to the pandemic, largely driven by long-term ill health.

Beneath stable headline figures, short term unemployment is rising

In August and October 2022, the employment rate increased by 0.2 percentage points on the previous quarter to 75.6%, which remains below pre-pandemic levels. The unemployment rate for the same time period increased by 0.1 percentage points to 3.7%. While this is still very low overall, it is concerning that the number of people unemployed for up to six months increased by 92,000 on the quarter, and this increase was seen across all age groups. This will need to be monitored closely, as evidence suggests that that time out of the labour market not only means a loss of income during the period of unemployment, but can also create a longer term scarring effect, through an increased likelihood of future unemployment and lower subsequent earnings when employed.

Figure 1: Proportion of people out of work and not looking for work (aged 16-64) between Aug-Oct 2019 and Aug-Oct 2022

Source: Work Foundation calculations based on ONS (13 December 2022) Dataset A01 November – Table 1 Labour Force Survey Summary (seasonally adjusted).

Additionally, the proportion of people out of work and not looking for work – the inactivity rate - decreased by 0.2 percentage points on the quarter to 21.5% in August to October 2022, after increasing and remaining high in relative terms since the start of the pandemic. There are two key changes to note within the latest data:

• The slight reduction in inactivity is driven by people aged 50-64, returning to the work from retirement. This may be an indicator of the impacts of the rising cost of living, with some households finding that lifestyle changes made a year ago are no longer affordable.
• Long-term sickness as a reason for being economically inactive declined slightly in this quarter, although the number of people in these circumstances is 384,000 higher than it was in the same quarter of 2019. There is some speculation that this may be partly related to individuals having to wait for NHS treatment, but there are a broader set of long-term structural issues that contribute to the disability employment gap. A proactive approach to tackling these barriers will be essential to ensuring disabled people and individuals with health conditions don’t lose their job during a period of ill health.

Inflation continues to eat into the real value of wages

For well over a year now, we have witnessed the rising cost of food, housing and heating outpace wage growth. Today’s labour market statistics show that regular pay growth (excluding bonuses) was 6.1% over the past three months. Although this is a strong growth rate, with inflation now at 11.1%, the real value of earnings has fallen. Wages are estimated to have declined in value by 2.7% on the year.

This means that households that are not usually considered to be economically vulnerable are now struggling to make ends meet, making difficult choices between heating and eating, or using credit cards to meet essential costs. With the Bank of England forecasting continued high inflation and a rise in unemployment into 2023, workers face a challenging year ahead.

Figure 2: Real value of regular pay (excl. bonuses) is now back down to 2008 levels

Source: Work Foundation calculations based on ONS (13 December 2022) Dataset A01 November – Table 16 Average weekly earnings at constant 2015 prices (seasonally adjusted).

The labour market shows little sign of softening (yet)

Although the unemployment rate increased slightly over the past quarter, resulting in a higher number of jobseekers, the number of job opportunities in September-November declined by 65,000 compared with the previous quarter. As a result, there is still approximately one jobseeker for each vacancy.

The number of vacancies has been declining since April-June this year, although they remain above pre-pandemic levels. We know that some sectors are experiencing labour shortages due to fewer people being available for more jobs. This picture is unlikely to change over the coming months. The Bank of England forecasts that unemployment will increase, which will raise the number of jobseekers available for work. However, at the same time we may see a further slowdown in hiring, coupled with an uptick in layoffs in advance of a possible recession. This quarter has seen the number of expected redundancies increase, now covering 3.1 people in every thousand.

However, we should not be alarmist. This figure remains lower than pre-pandemic levels and importantly, is low when compared to figures in the past decade. Of course, it is possible we will continue to see redundancies increase over the next months, but only time will tell.

Where will we be in 2023?

Over the next year, the economic and labour market picture will change, likely becoming worse before it gets better. It is key that policy makers are alive not just to the statistics, but to the real-world impact that economic pressures and shifts in and out of employment have on workers’ lives.

In his Autumn Statement, Chancellor Jeremy Hunt announced that a wider group of people who hadn’t previously been required to look for work must now meet with Work Coaches at their Jobcentre and seek increased earnings or hours, or face the risk of a sanction to their Universal Credit payments if they don’t. But this approach risks deepening the instability and insecurity of individual claimants, and forcing individuals to take ‘any job’ increases the probability that they will quickly fall back out of work.

At the same time, the Chancellor shared plans for a review of issues holding people back from participating in the job market, which is due to conclude early next year. Instead of taking a punitive approach, this review should focus on how employment support can be adapted to meet the needs of a wider group of people — including those living with a health condition — to enter or stay in work.

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