Pressures in the UK labour market are starting to ease, but wage growth has not slowed as much as economists expected, according to official data released on Tuesday.
Figures from the Office for National Statistics showed average wages in the private sector, excluding bonuses, were 6.9 per cent higher in the three months to February than a year earlier, down from growth of 7.3 per cent in the final quarter of 2022.
Public sector wage growth still lagged the private sector but by a slimmer margin, with average wages excluding bonuses up 5.3 per cent on the year.
The data leaves the Bank of England’s Monetary Policy Committee with a finely balanced decision on whether to raise interest rates from a 15-year high of 4.25 per cent, or hold them unchanged for the first time in 18 months, when it next meets on May 11.
The slowdown in wage growth — one of the key indicators that monetary policymakers are tracking — was more gradual than expected, owing to revisions to January’s figures and a fresh acceleration in pay in February.
Victoria Clarke, economist at Santander CIB, said Tuesday’s figures did “not deliver the reassurance that the MPC is likely to be looking for” of wage growth moderating towards rates consistent with its 2 per cent inflation target.
Modupe Adegbembo, economist at Axa Investment Managers, said the renewed strength in wages would “unsettle the MPC, adding to fears of greater persistence in inflation”.
But other developments suggested the labour shortages that have fuelled wage rises were starting to ease.
The unemployment rate edged up to 3.8 per cent from 3.7 per cent the previous quarter, the number of vacancies fell for a ninth consecutive month and the number of people choosing not to work or seek a job fell as students returned to the workforce.
This decline in economic inactivity boosted the employment rate by 0.2 percentage points from the previous three-month period to 75.8 per cent.
However, most of the growth was driven by part-time work and self-employment rather than by employers creating new posts. Samuel Tombs, chief UK economist at the consultancy Pantheon Macroeconomics, said this showed the labour market was “not nearly as hot as the employment figures imply”. But he added that the revisions to wage growth data meant there was an equal chance of the MPC leaving rates unchanged or raising them by 25 basis points.
Despite the rise in employment, the UK workforce remains smaller than it was before the Covid-19 pandemic. The number of economically inactive people of working age is still more than 400,000 higher than its pre-pandemic level; almost all of the increase represents people who say they are not in work because of a long-term health condition.
Tony Wilson, director of the Institute for Employment Studies, a research consultancy, said post-pandemic progress on boosting the number of people in work had been “painfully slow” and that it was “clearer than ever that we are being left behind by other major economies”.
Business groups also warned of continuing hiring difficulties, with Neil Carberry, head of the Recruitment & Employment Confederation, describing the shortage of workers as “the defining feature of our labour market right now”. However, he said the situation was “not as fizzy” as in 2022, with pay “rising strongly . . . but not at a rate that will cause further inflation”.
Jane Gratton, head of people policy at the British Chambers of Commerce, said vacancies remained “a drag anchor on firms, preventing them from fulfilling orders and taking on new work”. She called for ministers to swiftly implement their promised expansion of free childcare and to be “pragmatic” about broadening the list of shortage occupations for which immigration requirements are relaxed.
Employment minister Guy Opperman said the government was boosting training and childcare to “break down barriers for people out of work”, while increasing the minimum wage and extending cost of living support payments.
