Labour market ‘creaking rather than cracking’ following Budget
There’s been a growing air of pessimism around the labour market since Labour’s maiden Budget, and with good reason.
The government hiked national insurance and increased the minimum wage, both of which will contribute to higher employment costs.
On top of that, ministers are also pushing for a substantial overhaul of workers’ rights.
In this context, surveys since the Budget have pointed to a bleak picture of the labour market.
According to the Purchasing Managers’ Index (PMI), private sector firms have cut staff at the fastest pace since 2008 over the past two months, excluding the pandemic.
Catherine Mann, a policymaker at the Bank of England, flagged risks of ‘non-linear’ adjustments in the labour market (by which she means the risk of growing unemployment) as a justification for her bumper rate cut.
However, the latest set of official figures – released this morning – are marginally more encouraging.
“The hard numbers on the jobs market currently don’t look so bad,” James Smith, developed market economist at ING said.
Data not so bad
Unemployment remained steady at 4.4 per cent, whereas economists had expected it to increase to 4.5 per cent.
These figures should be taken with a healthy pinch of salt, given the ONS’s well-publicised difficulties with low response rates. Still, a swathe of other indicators painted a similar picture.
According to a ‘flash’ estimate, the number of payrolled employees rose by 21,000 in January, surprising analysts who had expected a fall.
This is an early estimate, so it is liable to substantial revision, but the previous trend is to be revised higher.
For example, December’s ‘flash’ estimate suggested that the number of payrolled employees fell by 47,000, but this was revised up to a decrease of 14,000.
“The upward revision to December payrolls and January’s small rise should be the focus today because they show that employment has stalled rather than collapsed,” Rob Wood, chief UK economist at Pantheon Macroeconomics said.
This means payrolled employment has grown by 49,000, or about 0.2 per cent, over the year.
This is not good, but a ‘stalled’ jobs market is better than a ‘collapsed’ one. It also suggests that the dire business surveys at the end of last year exaggerated the labour market downturn.
There’s a similar story on vacancies. The number of job openings fell in the three months to January, extending the run of consecutive decreases to 31 rolling quarters.
However, vacancies have increased slightly in each of the last two months, suggesting that the extended post-pandemic slump might be bottoming out.
“The labour market is creaking but not cracking,” Sanjay Raja, chief UK economist at Deutsche Bank said. “Some slack is emerging, but we aren’t seeing a worrying spiral in unemployment – just yet.”
And that’s the key question. Is it just a matter of time before the labour market cracks under the pressure of the Budget cost increases, which will only come through in April?
Surveys suggest the answer might be yes. This week’s study from the Chartered Institute of Personnel and Development indicated that a quarter of firms are planning job cuts in the coming quarter, the highest level in a decade excluding the pandemic.
Analysts at Nomura said it was “only a matter of time before this shows up more clearly in the official data”.
But there’s some cause for hope. After all, the surveys have been overstating the downturn for the past few months. There’s no particular reason to think they will get more accurate.
The figures suggest firms want to “keep staff levels high where possible,” Elizabeth Martins, senior UK economist at HSBC said, which would limit the potential downside.
The persistence of strong wage growth in what is still a relatively weak labour market points to continuing demand for the right workers too.
Looking over the range of shocks in the past few years, the labour market has performed remarkably well. Early indicators suggest it can withstand the Budget too.