UK jobs market ‘on the turn’ as unemployment rises to 4.3%, but real wages are growing again

Introduction: UK jobless rate hits 4.3%, but wage growth beats inflation

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

UK unemployment has risen, as more people lost their jobs over the summer.

The latest labour market report, just released, shows that UK unemployment rose by 159,000 in the last quarter, taking the jobless total up to 1.464m.

The increase in unemployment was largely driven by people unemployed for up to 12 months.

That lifted the jobless rate to 4.3% in the May-July quarter, up from 4.2% a month ago, and 3.8% in the previous quarter.

Employment fell, due to a drop in full-time self-employed workers, pulling the employment rate down to 75.5% in May to July 2023, 0.5 percentage points lower than February to April 2023.

But there’s better news on pay this morning – total pay, including bonuses, rose by 8.5% per year in the May-July quarter, helped by one-off bonus payments to NHS and Civil Service workers this summer.

That could be significant for millions of pensioners, as this earnings figure is used to set the rise in the state pension the following April.

Regular pay (which excludes bonuses) grew by 7.8%, the same as last month – and the highest since comparable records began in 2001.

CPI inflation dropped to 6.8% in July, so this shows that wages are rising faster than prices again, after a long squeeze due to the surge in inflation last year.

The ONS says:

Using CPI real earnings, in May to July 2023, total pay rose by 0.6% on the year and regular pay growth was 0.0% on the year.

Excellent news for households, but it might add to the pressure on the Bank of England to keep raising interest rates to fight inflationary pressures….

UK pay statistics to August 2023 — Photograph: ONS

Also coming up today

Today is the last day of trading at 24 Wilko stores across the UK, after the retail chain fell into administration.

Stores including those in Aldershot, Cardiff, Falmouth, Liverpool and Stafford are among those shutting today, with a further 28 closing on Thursday.

Yesterday, unions reported that all Wilko’s 400-plus stores are to close with the loss of more than 12,000 jobs, after talks with potential buyers failed to reach a rescue deal.

We’ll find out this morning if grocery inflation eased in the last few weeks, when Kantar releases its latest data on the supermarket sector.

The agenda

7am BST: UK labour market report
8am BST: Kantar releases grocery price inflation report
9am BST: Opec’s monthly oil market report
10.15am BST: UK Treasury committee hold hearing with Sarah Breeden, deputy governor of financial stability at the Bank of England.

Key events

Economic activity in the UK has risen, with many people unable to work due to ill health.

Today’s jobs report shows that the number of adults neither working nor looking for work rose by 63,000 in the May-July quarter, up to 8.78m.

That lifted the economic inactivity rate up to 21.1%, from 21% in the previous quarter.

The increase was led by more inactivity among 16-24 year olds, which may be due to the summer holidays.

The ONS explains:

The increase in economic inactivity during the latest quarter was driven by those inactive because they were students or inactive for other reasons.

Those inactive because they were long-term sick also increased to another record high. Those inactive because they were looking after family or home decreased to a record low.

Photograph: ONS

The jump in UK wage growth this summer will likely encourage hawkish policymembers at the Bank of England to vote for another interest rate increase at next week’s meeting.

So says Janet Mui, head of market analysis at wealth manager RBC Brewin Dolphin, who explains:

“Today’s data suggests a continuation of a softening in the UK labour market, for instance, the total number of employed fell by over 200K in the three months to July, while the unemployment rate has picked up to 4.3%.

The problem, and a big headache, for the Bank of England at this juncture is that wage growth remains very elevated, and that is a factor that the BoE judges to drive sticky core inflation. With that in mind, today’s 8.5% total wage growth figure (in which the private sector is +7.6% and public sector is +12.2%) lends support to the hawks for a 25 basis point rate increase in September.

While employment is in general a lagging indicator and wages lag payroll growth, the adjustments in wage growth in relation to a softening economic environment is taking a long time. This ultimately reflects the shortage of labour and unless there is a more painful adjustment in the economy it is difficult for wage growth to slow meaningfully.

The positive development is that workers are seeing wage growth on average outpacing inflation, which means an easing in the cost-of-living crisis.

In terms of the fiscal implication, average wage growth between May and July, which is a staggering 8.5%, is the figure that gets used for calculating the triple lock. The elevated rate means the fiscal position will be kept tight with little room for giveaways by the Chancellor in the Autumn Statement.”

Larry Elliott

Incidentally, it’s worth noting that the earnings figure on which the triple lock is calculated is not yet set in stone.

The data for earnings in the three months to July (showing the 8.5% rise in total pay) is provisional and may be revised.

The definitive number will be released next month. The ONS says revisions tend to be quite small but might be bigger than usual this year because of one-off payments to NHS staff and civil servants.

English rail fares could rise by 8% next year

English rail fares will rise by up to 8% in 2024 if the Government uses the same formula as this year, PA Media reports.

The Department for Transport (DfT) aligned this year’s cap on train fare increases with Britain’s average earnings growth for July 2022, which was 5.9%.

Figures published by the Office for National Statistics this morning show the same measure for this July alone was 8%.

The DfT has previously confirmed that next year’s fare rises will be below the Retail Prices Index (RPI) measure of inflation for July – which was 9% – but has not announced what formula it will use.

Norman Baker, director of external affairs at pressure group Campaign for Better Transport and former Liberal Democrat transport minister, said:

“The Government has yet to confirm next year’s rail increase, but if it follows the same formula as last year and uses today’s average earnings growth rate, passengers will face eye-watering increases.

“Rather than hammer rail passengers yet again, the Government should freeze rail fares – as they have done with fuel duty – until the long-promised ticketing reform takes place.”

UK jobs market is “clearly on the turn”

With employment levels falling by 207,000 in the last quarter, and unemployment up by 159,000, the UK jobs market is “clearly on the turn”, warns Martin Beck, chief economic adviser to the EY Item Club.

Beck explains:

“Continued strength in pay came despite a rise in the Labour Force Survey (LFS) unemployment rate to 4.3%, 0.5 percentage points up on three months earlier and the highest in almost two years.

The increase was more than accounted for by a sizeable fall in employment. Inactivity rose slightly, breaking the previous downward trend.

Weakening labour demand was also evident in job vacancies dipping below the one million mark for the first time since June 2021.

Resolution: UK suffers biggest employment fall outside of a recession

The number of people in employment in the UK shrank by 207,000 in the last quarter, to 32.88m, today’s jobs report shows.

That, according to the Resolution Foundation, is the biggest employment fall outside of a recession on record, and a clear sign yet that rising interest rates are cooling the labour market.

Hannah Slaughter, senior economist at the Resolution Foundation, explains:

“Britain saw the biggest employment fall outside of a recession this summer. This is the clearest sign yet that the Bank of England’s rate rising cycle is starting to cool the jobs market.

“But while higher unemployment should lead to lower wage growth in the coming months, it certainly hasn’t had that effect yet, with earnings growing at a record pace.

“The short-term pay boost could end up benefiting pensioners more than workers as it is set to deliver a big permanent boost to the state pension next April. In this context it would be wholly unfair to hold down working-age benefits, especially as poorer households are already set to see their incomes fall next year.”

Pay growth continues to present “a conundrum” for the Bank of England” says Yael Selfin, chief economist at KPMG UK.

“The labour market is starting to feel the weight of slowing activity as the UK economy faces several headwinds. The unemployment rate rose to 4.3%, vacancies are down below 1 million, and job-to-job flows have moderated suggesting that workers are less confident to switch positions.

However, earnings growth came in at 8.5% overall and 7.8% excluding bonuses. Today’s pay data has significance not just for monetary policy but also for government spending, as the July figure determines the uprating of pensions next year under the triple lock guarantee.

Despite clear signs of weakening momentum, we still expect the Bank of England to raise interest rates by 25 basis points next week, although the threshold for further increases may be hard to meet given the current economic outlook.”

The UK’s strong wage growth will create challenges for both the Bank of England and the Treasury.

Higher earnings risks keeping inflation higher for longer, while an 8.5% increase in the state pension (under the triple lock system) would leave Jeremy Hunt with less fiscal firepower.

Paula Bejarano Carbo, associate economist at the National Institute of Economic and Social Research, explains:

“Today’s labour market numbers indicate once again that, despite increasing unemployment and falling vacancies, wage growth remains elevated.

Continued high wage growth poses challenges to both monetary and fiscal policymakers. On the one hand, the MPC will need to consider the extent to which this elevated wage growth may continue to generate persistence in inflationary pressures at its meeting next week; on the other hand, today’s data will likely determine another elevated figure for the pensions triple lock, possibly squeezing the tight margin the Chancellor left himself for meeting his fiscal targets.”

UK grocery inflation has fallen

Further good news in the cost of living crisis – grocery inflation has dropped to a new one-year low.

Data firm Kantar has reported that prices across grocers were 12.2% higher than a year ago for the four weeks to September 3, down from the previous month’s 12.7%.

This is the sixth monthly fall in a row, since grocery inflation peaked at a record 17.5% in March.

Fraser McKevitt, head of retail and consumer insight at Kantar, points out that grocery inflation of 12.2% won’t be a number to celebrate for many households.

Our data shows that 95% of consumers are still worried about the impact of rising grocery prices, matched only by their concern about energy bills.

After a full year of double digit grocery inflation, it’s no surprise that just under a quarter of the population consider themselves to be struggling financially – although this is a very slight drop compared to May.

TUC: UK economy is in “the danger zone”

The TUC has issued a sharp warning that the UK economy has fallen into the “danger zone”.

TUC General Secretary Paul Nowak explains:

“Unemployment is up by nearly a quarter of a million over the last year.

“And while average pay has finally inched above inflation, real wages still falling across the public sector, retail, hospitality and construction.

“If pay packets had been growing at pre-crisis levels, workers would be on average £14,700 better off.

“It’s little surprise that families are worried sick about paying their bills and keeping their jobs.

“The government is in denial. The Tories’ lack of a credible economic plan is costing the country dear.”

The number of vacancies across the UK fell by 64,000 in the last quarter, as demand for new workers cooled.

That lowered the number of vacancies in June to August 2023 to 989,000.

Vacancy numbers fell on the quarter for the 14th consecutive period in June to August 2023, and were lower in 13 of the 18 industry sectors, suggesting a fairly widespread retrenching by firms.

Minister for Employment, Guy Opperman MP, says the government wants to remove barriers stopping people finding work:

“This Government’s record on employment is clear; there are one million fewer workless households than in 2010 and the number of people on company payrolls is a near record high. But we are not complacent about the challenges we face, which is why we remain focused on removing barriers to help people find and succeed in work.

“Our £3.5 billion package to deliver more tailored job support combined with our expanded childcare offer will help unlock individuals’ potential and grow the economy.”

Hunt: Must stick to plan to halve inflation

Chancellor of the Exchequer, Jeremy Hunt has found the positives in today’s jobs report, saying:

“It’s heartening to see the number of employees on payroll is still close to record highs and that our unemployment rate remains below many of our international peers.

“Wage growth remains high, partly reflecting one-off payments to public sector workers, but for real wages to grow sustainably we must stick to our plan to halve inflation.”

The total number of people on company payrolls has dipped over the summer.

Today’s jobs report shows that payroll numbers fell by 1,000 in August, after a 3,500 drop in July.

Payroll numbers had hit record levels since the economy unlocked after the early waves of Covid-19, rising over 30 million, but this trend appears to have now fizzled out.

IoD: Time for Bank of England to stop raising interest rates

The Institute of Directors are urging the Bank of England to stop raising interest rates, saying earlier increases have hurt the economy.

Kitty Ussher, Chief Economist at the IoD, says today’s jobs data shows a weakening labour market, so the Bank should keep interest rates on hold when it next meets on 21 September.

“Although wage inflation still feels high, the headline rate is now being driven by the recent public sector pay settlements which will not lead to cost pass-through on the part of their employers. Private sector pay wage pressure, although also high, has grown at a lower rate in recent months and is likely to fall further as the labour market loosens and the headline rate of inflation comes down.

“Our own data shows that the large interest rate rise in June led to a worsening in the way that business leaders considered the outlook for the economy. The Bank of England should now give its medicine time to work. The holy grail of a soft landing where we bring inflation down without causing a recession is still possible; the risk now is that too much tightening will unleash a series of negative events that causes the Bank to undershoot its inflation target further down the line.”

The financial markets, though, expect the Bank to raise interest rates again at this month’s meeting, from 5.25% to 5.5%.

Yesterday, Catherine Mann, one of the nine members of the Bank’s rate-setting monetary policy committee, argued it was better to raise interest rates too far rather than take the risk of allowing inflation to become embedded.

Pay rises for public sector workers rose at a record pace last summer, but still lagged behind the private sector.

Today’s labour market report shows that annual average regular pay growth for the public sector was 6.6% in May to July 2023 – the highest since comparable records began in 2001.

But pay across the private sector rose by 8.1%, which is “one of the largest annual growth rates seen outside of the coronavirus (COVID-19) pandemic period”, the ONS says.

IFS: Average earnings will determine rise in state pension next April.

Today’s figure, showing that average earnings grew by 8.5% in the year to May to July, is “particularly important”.

It is very likely to be used in determining how much the state pension increases by next April for the UK’s 12 million pensioners.

So explains Jonathan Cribb, associate director at the Institute for Fiscal Studies.

‘Under the triple lock, the state pension increases every April in line with the highest of average earnings growth in the year from May to July of the previous year, CPI inflation in September of the previous year, and 2.5%. If today’s figure is indeed the highest of those three, it means that a full basic state pension is set to rise from its current £156.20 per week to £169.50, while a full new state pension – which those who reached state pension age since April 2016 can receive – would rise from £203.85 per week to £221.20.

‘Since its introduction in 2010, the triple lock, together with the introduction of the new state pension, has significantly increased the generosity of the state pension relative to earnings. But this comes at a cost to public finances – the triple lock has added £11 billion to spending on the state pension in 2023–24 relative to price or earnings indexation. Compared with the OBR’s forecast from just six months ago, today’s figures mean spending on the state pension is set to increase by another £2 billion in 2024–25.

‘These increasing public finance pressures caused by the triple lock, especially in periods of macroeconomic volatility as we have experienced in recent years, risk the sustainability of the state pension system, meaning heightened uncertainty for individuals planning their retirement finances.’

“Today’s figures mean spending on the state pension is set to increase by another £2bn in 2024–25.”@JCribbEcon responds to today’s average earnings growth figure, which is very likely to determine how much the state pension increases by next April.https://t.co/AjkS6Fsuzl

— Institute for Fiscal Studies (@TheIFS) September 12, 2023

[There is one proviso – today’s wage data could be revised in a month’s time, and it’s that number which will be used].

The long-term future of the triple lock is unclear, though. On Sunday, Rishi Sunak refused to commit to keeping it in the next Conservative manifesto.

Here’s the key points from today’s UK labour market report, from ONS Director of Economic Statistics Darren Morgan: