UK unemployment drops to pre-pandemic levels

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UK unemployment dropped back to its pre-pandemic level at the start of 2022, but the squeeze on living standards deepened, as earnings failed to keep pace with inflation despite record levels of vacancies.

The jobless rate averaged 3.8 per cent in the three months to February, returning to lows last seen in 2019, the Office for National Statistics said on Tuesday.

But the workforce is still smaller than it was before Covid hit. Despite the number of job openings rising to hit a new record high of 1.29mn in the three months to March — with four in every 100 jobs unfilled — the employment rate was unchanged at 75.5 per cent in the three months to February, well short of its pre-pandemic level.

This is because rising numbers are choosing not to work: the inactivity rate rose 0.2 percentage points to 21.4 per cent, driven by people saying they were looking after family or home, had retired, or had long-term sickness.

The figures highlight the difficult trade-off for monetary policymakers, who are faced with a tight labour market in which wage growth is picking up but is still failing to keep pace with rising prices.

The ONS said growth in average weekly earnings, excluding bonuses, had picked up to 4 per cent in the three months to February — although it noted that this was artificially boosted by the large numbers who had been furloughed on 80 per cent pay a year earlier.

Thomas Pugh, economist at RSM UK, said these figures would “make the Monetary Policy Committee even more concerned that the recent burst of high inflation is starting to be reflected in wages” and would give the MPC “all the justification it needs” to raise interest rates again in May.

Even with the distortion of furlough, however, the surge in inflation meant regular earnings had fallen 1 per cent in real terms over the past year, the biggest drop since 2013. Total pay growth, at 5.4 per cent, was still just outstripping inflation, the ONS said, because of strong bonus payments.

“Soaring inflation is casting a big shadow over an otherwise buoyant labour market,” said Nye Cominetti, senior economist at the Resolution Foundation, a think-tank. He noted that pay had fallen much more sharply in real terms for public sector workers, a gap that would make the coming period of public sector pay restraint “even more challenging”.

Suren Thiru, head of economics at the British Chambers of Commerce, said the figures underlined the “historic hiring crunch facing firms”. But he also warned that labour market conditions could weaken soon, if soaring inflation and a rising tax burden “stifled” consumer spending while also limiting companies’ ability to recruit and raise wages.

Ellie Henderson, economist at Investec, said that, despite the “vast” pool of vacancies, “hiring confidence can quickly be dented if the high inflationary environment results in households cutting back expenditure while firms struggle with rising costs”. 

Rishi Sunak, chancellor, said the figures showed the “continued strength of the jobs market”, adding that the government was providing £22bn in support to “cushion the impacts of global price rises” on the cost of living.

But evidence of the worsening squeeze on living standards will add to pressures for the government to do more to bolster household incomes.

Frances O’Grady, general secretary of the Trades Union Congress, said rising hardship was a “political choice”, calling for the chancellor to deliver an immediate boost to the minimum wage, pensions and benefits.

Tony Wilson, director of the Institute for Employment Studies, said a “triple whammy” of falling pay, more people out of work and labour shortages would worsen the squeeze on living standards as inflation rose over the summer, with unfilled jobs holding back growth and potentially pushing costs higher. He called for “urgent action” to protect incomes and bring more people back into work.

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