Britain’s economy is suffering from a textbook case of stagflation, and the symptoms are clear from the latest labour market trends. It looks like a complex picture. The number of people looking for work rose while the number of job vacancies fell. Hours worked in the economy were down while days lost through strikes in 2022 were the highest annually since 1989.
In fact, the diagnosis is straightforward. There was zero growth in the final three months of 2022 while the annual inflation stood at above 10%. Attempts by the Bank of England to reduce inflationary pressure through higher interest rates are feeding into lower levels of activity – but only slowly. There has been no sudden collapse of the sort seen during the global financial crisis of 2008. There are a few complications, as shown by the latest figures from the Office for National Statistics. The legacy of the pandemic has affected the supply of labour, largely because workers in the older age groups have given up work, either through choice or due to long-term sickness. Although the number of vacancies has fallen since last summer, it is still well above pre-pandemic levels. Businesses and employees are responding to these trends in predictable ways. Firms are looking past the current economic slowdown and wondering whether they will be able to replace workers in the future if they make them redundant now. Mostly, they are hoarding staff, taking on part-time rather than full-time employees, and paying their workers more. Annual growth in regular pay – excluding bonuses – stood at 6.7% in the three months to December. In the private sector, earnings growth was 7.3%.
Labour shortages have made it easier for some groups of workers to secure higher pay deals. Even so, private sector pay is not keeping pace with price rises, and the resulting squeeze on real incomes is a big factor behind the sluggish state of the economy. Public sector workers are facing a bigger hit than those in the private sector, leading to widespread industrial action. There are, though, signs that people who were formerly inactive – neither working nor actively looking for a job – are starting to return to the jobs market. Again, this is only what might be expected in light of the problems many people are having to make ends meet. Inactivity fell by 113,000 towards the end of last year as long-term sickness dropped and early retirees made themselves available for work. The government can tackle stagflation with one of two cures. First, it can try to ease the pressure for higher wages by taking steps to increase the supply of labour. It could, for example, change the pension rules to encourage more early retirees back to work. It could make childcare less expensive. It could take the advice of the British Chambers of Commerce and reform the shortage occupation list to make it easier for firms to fill job vacancies from outside the UK when they cannot recruit locally. Mel Stride, the work and pensions secretary, is looking at whether tougher benefit rules are needed to move people from welfare into work. The alternative is for the Bank of England to carry on pushing up interest rates until higher interest rates lead to higher unemployment and less upward pressure on wages. In all likelihood, there will be a combination of both approaches. So far, the labour market has proved to be remarkably resilient but that won’t last. There are already signs from the latest data for inactivity and pay that the labour market is on the turn. The fact that unemployment has started to rise suggests one thing: this is going to hurt.