Wage growth is good news for workers – but not necessarily the economy

While employers are forking out more for services, the Bank of England will be stripping away the benefits to help control inflation.

The latest snapshot of Britain’s labour market reveals an economy still restrained by worker shortages with wage inflation driven to a new post-pandemic peak that, in turn, increases the likelihood of another interest rate increase next week.

The ONS data  reveals wages rose by 7.2% in the three months to April, higher than expected and a figure that will weigh heavily in the Bank of England’s calculations about the path of rates.

Adjusted for CPI inflation real wages – the spending power of the pound in your pocket – fell 2.3%, demonstrating the challenge of the current inflationary environment.

That wage growth, sharper than anticipated, came despite what appears to be a slight easing of a jobs market that has struggled with a mismatch between vacancies and available workers for more than a year.

Economic inactivity, which covers all those for various reasons not in work or looking for a job – has been a key factor in limiting labour supply, but the total fell for a fifth consecutive month.

While welcome, that easing conceals a new record number of people not working because of long-term sickness, rising to 440,000 more people out of the jobs market because of ill-health since the pandemic.

That helps explain the curiosity of the UK jobs market in which unemployment is essentially stable (3.8%) and there are a record number of people in work, touching 30 million for the first time since the COVID-19 pandemic, yet there are more than one million vacancies unfilled.

The number of vacancies actually fell, but not necessarily because workers are easier to find, say the ONS, but because uncertainty is causing employers across industries to hold back on recruitment.

With 1.05 million vacancies and 1.3 million people unemployed, the jobs market is less tight than it was, but a ratio of 0.8 workers for every job means employers have to work hard to find candidates, and pay them well when they do.