Britain’s jobs market is in a challenging position. Job losses are rising, fewer employers are advertising for staff, and the resurgence of inflation is eroding the value of workers’ pay. For Rachel Reeves this is bad news.
The latest figures showing a decline in the number of employees on company payrolls in July, alongside a slowdown in annual wage growth in the three months to June, underscore the challenge facing the chancellor.
Having made rebooting the economy the No 1 priority of a Labour government, the evidence a year in is hardly encouraging. Employers cut headcount by 8,000 last month. Since the general election in July last year, the number of employees on company payrolls has collapsed by 164,000.
The official headline unemployment rate remained stuck at 4.7% in the three months to June, above the 4.2% level Reeves inherited a year ago, at the highest rate since 2021.
Economists blame two things in particular: a weak economic outlook, and the chancellor’s £25bn rise employer national insurance contributions (NICs) announced at her first autumn budget in October last year and implemented in April.
Tuesday’s figures showed job losses have been concentrated most in the retail and hospitality sectors, which as heavier users of part-time and flexible contracts, lower pay and seasonal work, are among the most exposed to the rising costs of employment.
Hiring intensions have fallen to record lows as the uncertainty facing the UK economy has risen, and as employers face pressures from Donald Trump’s trade war, sluggish consumer spending, lingering inflation and elevated interest rates.
Faced with this outlook, the Bank of England had little option but to reduce borrowing costs to 4% last week. However, it warned that inflationary pressures were rekindling, which could delay the timing of another cut.
For workers, the re-emergence of a period of high inflation – forecast to reach a renewed peak of 4% by September – will erode the real-terms value of their average pay settlements. Resilience in average earnings growth, despite the economic uncertainty, has puzzled some analysts, including the Bank.
However, the crossover point where inflation overtakes average annual pay is looming. The Bank’s network of agents reckon pay growth will slow in the coming quarters, to about 3.75% by the end of the year.
The latest figures for the three months to June put annual growth in real terms at 1.5% for regular pay and 1.1% for total pay, including bonuses.
Wage growth is likely to weaken further over the coming months, in a renewed squeeze on households.
Despite this, there are some crumbs of comfort. The hit from the NICs increase is now likely to have passed the point of most pain for employers. While the fallout is clear, and job losses have risen, they have not rocketed.
Economists point to the number of HR1 advanced redundancy notifications, which firms are required to submit to the government if they plan to cut staff, remaining relatively subdued in July.
Although the labour market is cooling, it is doing so at a relatively gradual pace. This is a slowdown, not the collapse predicted by the most vocal employers’ groups.
For the Bank, that pace of change is among the reasons why its policymakers are taking a careful and gradual approach to cutting interest rates any further. For the chancellor, it also shows why her autumn budget will need to be carefully calibrated to prevent a deeper hit to workers.
