Tight labour market shows signs of cooling as pandemic recovery may be running out of steam

High inflation is causing real pay packets to shrink at their fastest rate in a decade, while the slowdown in growth may be causing the tight labour market to cool as unemployment ticks up, the Resolution Foundation said today (Tuesday) in response to the latest ONS labour market statistics.

With CPI inflation hitting a 40-year high, real (CPIH-adjusted) regular pay fell by 2.2 per cent – the fastest fall since 2011.

The labour market remains tight, despite the ongoing cost-of-living crisis and recent slowdown in economic growth, with the number of vacancies reaching a record high of 1.3 million, and payrolls growing by 0.3 per cent in May.

But there are signs that our tight post-pandemic labour market may be starting to cool. Although unemployment was at a joint 50-year low in March, short-term unemployment has risen over the past few months for the first time since 2020 and total unemployment actually rose in April. Typical pay for employees fell in May, offering the Bank of England reassurance that a wage price spiral is far from underway.

If the labour market is a turning point, and this trend of rising unemployment continues over the coming months, as forecast by the Bank of England, people looking for work or more hours to maintain their incomes may find themselves frustrated, says the Foundation.

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

“Britain is in the midst of the highest inflation in four decades, and a recovery that has run out of steam. But we are not yet seeing a wage spiral as some are expected, but instead the deepest pay squeeze in over a decade.

“The labour market could now be at a turning point. On the one hand, vacancies are at a record high. On the other, unemployment has started to tick up. If this continues, families may start to find it harder to work more if they’re feeling poorer, but the Bank of England may feel more confident that it can avoid domestic inflation pressures spiralling.”