The UK job market surprised analysts in June, defying expectations of a downturn with a decline in unemployment, though wage growth showed signs of slowing.
Official data from the Office for National Statistics (ONS) revealed that the unemployment rate dropped unexpectedly to 4.2% from 4.4% in the three months leading up to June, marking an improvement from the previous quarter’s figures.
However, while more people found work, wage growth excluding bonuses saw a deceleration. Year-on-year, wages grew by 5.4% over the three months to June, down from 5.7% in the previous quarter. This represents the slowest wage increase since the three-month period ending July 2022, which recorded a 5.2% rise.
Despite the slowdown, when adjusted for inflation, wages still rose by 1.6%, offering a modest boost to many workers’ purchasing power and overall standard of living. This trend suggests that the cost-of-living crisis might be easing slightly for some households.
Meanwhile, the number of job vacancies also declined, signaling a gradual return to pre-pandemic levels in the job market. This decrease in vacancies suggests that the frenetic pace of hiring seen in previous months is stabilizing, as employers adjust to the post-pandemic economic landscape.
Economists are split on how these figures might influence the Bank of England’s (BoE) upcoming decision on interest rates.
The National Institute of Economic and Social Research (NIESR) warned that the ongoing wage growth, despite its recent dip, could stoke inflation further, potentially leading the BoE to keep interest rates high for a prolonged period.
“The persistence of strong wage growth raises concerns about stickier inflation, which may prompt the Bank of England to remain cautious about further interest rate cuts,” the NIESR cautioned.
Wage Decline Spurs Interest Rate Debate
On the other hand, Capital Economics, a leading consultancy, believes the decline in wage growth could be enough to persuade the BoE to proceed with two more quarter-point interest rate cuts this year, bringing the rate down from 5% to 4.5%.
This potential easing of monetary policy was well-received by the financial markets, with the pound gaining 0.33% against the dollar on Tuesday, reaching $1.2809 — the highest level since early August.
A closer look at the figures reveals that growth in total pay, including bonuses, fell significantly from 5.7% to 4.5%. This sharp decline can be partly attributed to the reluctance of employers across various sectors to hire new staff, as reflected in recent business surveys.
However, the ONS notes that this data may be skewed by one-off bonus payments made to NHS staff in June 2023, which inflated the previous figures.
The report also highlighted ongoing challenges in the labor market, particularly concerning economic inactivity. The number of people of working age who are neither working nor actively seeking work remains high at 9.41 million, or 22.2% of the working-age population.
This figure has increased by 350,000 since last year, with many citing ill health as the primary reason for their inability to work.
Julia Turney, a partner at the consultancy Barnett Waddingham, pointed out that today’s workforce is grappling with unique challenges. “The workforce we are dealing with today is older, increasingly remote, and more in touch with mental health challenges than ever before,” she noted.
Turney referred to a study by Mental Health UK earlier this year, which found that one in nine UK adults had experienced high levels of stress in the past year, leading to time off work.
Amid these concerns, Chancellor Rachel Reeves is facing mounting pressure to boost funding for mental health services, with the aim of helping people return to work.
Addressing the latest figures, Reeves acknowledged the need for continued efforts to support employment. “Today’s figures show there is more to do in supporting people into employment because if you can work, you should work,” she said.
Reeves is expected to tackle these issues in her upcoming budget, set to be delivered on October 30, where she will outline her plans for spending, welfare, and taxation in an effort to “fix the foundations” of the UK economy.
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