Real pay rising but overshadowed by historically high inactivity due to long-term sickness
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The Office of National Statistics (ONS) released the first full set of labour market data for five months today after months of releasing a more limited set of experimental statistics. The Labour Force Survey (LFS) has now been reweighted using the latest population estimates. However, due to low response rates, there is still increased volatility around the survey and any interpretations of the data must be treated with caution.
Labour market headline figures hide key weaknesses
This month’s headline indicators suggest that the labour market remains resilient in the face of low growth and high interest rates. Employment rose by 0.2 percentage points on the quarter to 75.0% but remains 1.2 percentage points below pre-pandemic levels while unemployment fell by 0.2 percentage points. Economic inactivity, which refers to people who are out of work and not looking for work, remained unchanged at 21.9% of the total working age population. However, this robust headline data masks the underlying structural challenges that continue to hold back the UK labour market.
Growth in real wages likely to be temporary
Pay growth remains strong with nominal regular pay growth at 6.2% and real pay growing at 1.8% as inflation eases. The wholesale, retail and hospitality sectors saw the strongest nominal pay growth of 7.2% which is particularly encouraging given that these sectors often have high proportions of insecure workers. However, while pay growth in the latest quarter was strong, it was below the record rates seen in the summer of 2023 and has been easing off since May-July 2023.
This slowdown in pay growth combined with another fall in vacancies of 26,000 on the quarter indicates that real term pay increases may be transient and will not be enough to make up for the erosion of living standards we have seen over the last few years. The Office of Budget Responsibility predicts that we will be 3.5% poorer in 2024-2025 relative to before the pandemic and that living standards will recover to its pre-pandemic level only in 2027-2028.
Long-term sickness challenge looms large
Economic inactivity due to long-term ill-health increased by 64,000 to 2.8 million in October-December 2023 which makes up approximately 30% of the overall inactive population. The reweighted LFS data illustrated that the long-term sickness challenge is starker than previously understood. There are now just under 700,000 more people out of work due to ill-health than before the pandemic. The continued rise of inactivity in this group highlights the importance of designing tailored employed support to help those with complex barriers to entering the labour market.
Number of economically inactive due to long-term sickness (1993-2023)
Source: ONS (13th Feb 2023) Dataset A01 – Table 11: Economic Inactivity for those aged from 16-64 (seasonally adjusted).
The Government has taken some sensible steps to help those with disabilities and health conditions back to work. As part of the Government’s Back to Work Plan, Secretary of State for Work and Pensions Mel Stride and Chancellor Jeremy Hunt announced they would increase investment in employment and health support programmes such as Individual Placement and Support, NHS Talking Therapies and Universal Support.
However, these welcome measures are less likely to be effective if the Government doubles down on its approach to ramping up benefit conditionality and punitive sanctions. Work Coaches can find it difficult to build relationships with claimants based on genuine engagement and support if they are also responsible for monitoring compliance. Claimants may be compelled to take up the first job available to avoid losing their benefits instead of taking up employment that would help them manage their health conditions and remain in employment in the long-run. Voluntary employment support programmes, like Universal Support, are more likely to help those with long-term health conditions and disabilities back to work.
Government faces key decisions ahead of Spring Budget
The UK labour market appears resilient but underlying challenges remain. As we approach the Spring Budget on March 6th, the Government must continue its push to support people with long-term illness back into work. One in five of those who are economically inactive would like a job. With more tailored employment support, many of these people could re-enter the labour force. Addressing the challenge of health-related inactivity must be the central focus of policymakers going forward and is likely to be a key factor in boosting economic growth in the future.
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