The resilience of the UK labour market is set to face a new test as Chancellor Rachel Reeves introduces tax rises for employers amid signs of cooling job growth and creeping unemployment. While the jobless rate remains historically low, the spotlight is now on how businesses and the jobs market will react to the fresh headwinds.
Chancellor’s Budget Moves Raise Eyebrows
In her recent budget, Rachel Reeves made two announcements that are bound to impact the cost of employment in the UK. First, the national minimum wage is set to increase by 6.7%, putting upward pressure on labour costs. Second, and perhaps more significantly, the Chancellor has decided to hike employer national insurance contributions.
These moves have raised concerns among economists and business leaders about potential job losses and hiring freezes as companies grapple with increased overheads. According to a close source, “Inevitably, the chancellor’s decisions will have some effect, but it will take months to assess how big those effects will be.”
Cracks Appearing in Labour Market Resilience
On the surface, the UK jobs market appears to be in decent shape. The unemployment rate stood at 4.3% in the three months to September, which is still low by historical standards despite ticking up from 4% in the previous quarter. However, dig a little deeper and some worrying signs emerge.
Payroll numbers from HMRC, an alternative measure of job growth, fell by 5,000 in October – the fifth decline in the past seven months. Vacancies are also trending downwards, dropping by 35,000 in the three months to October to just above pre-pandemic levels. As Sanjay Raja, chief UK economist at Deutsche Bank notes, “There are some cracks appearing in the labour market – even before budget measures start to bite.”
Pay Growth Distorted by One-Off Factors
At first glance, the uptick in average earnings growth from 3.9% to 4.3% in the three months to September paints a rosier picture of the labour market. However, experts caution that the annual comparison is distorted by one-off payments to civil servants in summer 2023, masking the underlying slowdown in wage rises.
While pay growth appears to have strengthened, the reality is less encouraging once bonuses and base effects are stripped out.
– Sanjay Raja, Deutsche Bank
Balancing Act for Monetary and Fiscal Policy
The softening jobs market presents a tricky balancing act for both the Bank of England and the Chancellor. For the central bank, signs of labour market slack may provide room to pivot to interest rate cuts sooner than previously anticipated. However, policymakers will be wary of moving too quickly and risk reigniting inflation pressures.
On the fiscal side, Rachel Reeves will be hoping that the labour market’s resilience can weather the coming storm. Job losses and rising unemployment would put pressure on government finances through higher benefit payments and lower tax receipts, potentially derailing efforts to stabilize the public debt trajectory.
Navigating an Uncertain Path Ahead
As the UK economy navigates the post-pandemic landscape, the jobs market finds itself at a crucial juncture. Much will depend on how businesses react to rising employment costs and whether consumer demand can hold up in the face of squeezed incomes and higher borrowing costs.
One thing seems certain – the days of glossing over the labour market figures are over. Every release will be scrutinized for clues on the economy’s health and the effectiveness of government policy. The UK jobs market’s resilience is about to face its sternest test yet.
