Unemployment down but wages failing to keep pace with inflation, as UK reaches ‘limits of recovery’

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The Resolution Foundation has warned that the UK’s ‘real-pay squeeze’ will get worse in 2022 and is unlikely to end until summer 2023

Experts are predicting that the UK’s real pay squeeze ‘will get deeper in 2022’, as the latest labour market statistics show a mixed recovery, with wages failing to keep pace with the rising cost of living.

The TUC has warned that the cost of living crisis will get worse unless the government acts now, as ONS data shows real wages fell by 1.5% over the year, using CPI.

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What do the latest ONS labour market statistics show?

According to the latest ONS statistics, real pay using the CPI measure of inflation has fallen at the fastest rate in eight years.

At the same time, the unemployment rate has dropped close to a record low, at just 3.9%, with 75.6% employment and vacancies at a record high of 1.3m.

In theory, a high number of vacancies coupled with a low rate of unemployment should lead to higher wages.

However, typical nominal pay for employees fell in February, and pay growth in January was strongest among high earners, meaning real wages are likely to fall fastest for those on low incomes who are already struggling.

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ONS data shows that those working in the finance and business services sector have seen the largest growth rate, at 8.6%, as well as strong bonus payments, compared with a 2.4% growth rate among public sector workers.

Inflation is forecast to reach 8% in the coming months, with a further spike expected toward the end of the year, meaning it will almost certainly outpace the 6.6% increase in the National Living Wage scheduled for April.

Nye Cominetti, Senior Economist at the Resolution Foundation, said the latest figures show a huge increase in older workers leaving the labour market, suggesting “we may be reaching the limits of Britain’s jobs recovery”.

Cominetti said: “The picture on pay is more mixed, with wages rising fastest in high paying sectors like finance and among high earners. But overall surging inflation will wipe out any wage gains in 2022.

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“Britain’s real pay squeeze, which started as far back as summer 2021, will get deeper in 2022, and is unlikely to end until summer 2023.”

The North East had the highest unemployment rate for the three months to January 2022, at 5.5%, while Yorkshire and Humber saw the biggest increase in economic inactivity.

The IPPR North think tank has said the labour market figures show that the government’s plans for a high growth economy “continue to fall flat”.

Jonathan Webb, Senior Research Fellow at IPPR North said: "If this government is serious about creating a high wage, high growth economy, it needs to start delivering on its promises to level up the North.

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“A strong starting point would be to double down on efforts to grow the North’s net zero economy. This must be coupled with a concerted effort to ensure that people have the skills they need to access good jobs and are able to make the most of these future growth opportunities".

What can be done to address the rising cost of living?

Responding to the new figures, the head of the TUC has called on the government to boost Universal Credit and introduce a windfall tax on oil and gas profits in the spring statement, in order to help out ‘hard-pressed families’.

The TUC has previously warned that energy bills are likely to rise at least 14 times faster than wages this year.

TUC General Secretary Frances O’Grady said: "Working people deserve financial security and a wage they can live on.

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“But instead, they are facing the steepest decline in real pay for eight years, and a cost of living crisis that will get worse if the government doesn’t act now.

“Household budgets are already stretched to the brink and can’t take any more.

“We need a plan to get wages rising in all jobs, a boost to Universal Credit, and a windfall tax on oil and gas profits – with the money raised going to energy grants for hard-pressed families.”

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