Positive British labor market data belie the rise in the number of long-term sick people
On the face of it, the UK labor market is in poor health. Employment rose in the last three months of 2023 and unemployment fell to 3.8%. Profits, adjusted for inflation, rose for the sixth month in a row. These are all traditional signs of strength – and not of an economy that may have been in recession in the second half of last year.
Scratch below the surface and things look less rosy. The last bulletin from the Office for National Statistics (ONS) reveals that one of the reasons the job market is so hot is the lack of workers, caused by long-term ill health. The number of people inactive for health reasons reached 2.8 million at the end of 2023 – an increase of more than 200,000 from the previous year and an increase of 700,000 since before the Covid pandemic. In a literal sense, this is a sick economy.
The absence from the labor market of so many potential employees has consequences. There are still many vacancies, even though the economy has been flattening for more than two years. Although the number of vacancies shows a downward trend during this period, at 932,000 they are still above the pre-corona crisis level.
Employers are also trying to close the gap by hiring more people from abroad. The number of British-born workers fell by 312,000 between the fourth quarter of 2022 and the fourth quarter of 2023, while the number of foreign-born workers rose by 405,000.
Yet the labor market remains tight and this is reflected in the pay. As with vacancies, the rate of profit growth is slowing – but not as fast as before bank of England and the financial markets expected this.
Regular private sector wage growth – which is closely watched by Threadneedle Street’s Monetary Policy Committee (MPC) – was 6.2% higher in the three months ending in December than in the same period a year earlier. That was down from 6.6% in the three months to November, but higher than the Bank’s forecast of 6%.
There are some obvious conclusions from the ONS data. One is that employers will resist measures that would sharply restrict the flow of migrant workers to Britain.
A second is that there will be pressure on Jeremy Hunt to use next month’s Budget to announce measures to tackle long-term illness. The Chancellor could be tempted to tighten benefit rules but was warned against doing so by the Work Foundation, which said cuts to welfare benefits could risk pushing those reliant on universal credit into are pushed into low-paid, precarious work, which would exacerbate their underlying health problems. More carrot, less stick was the advice of Ben Harrison, the think tank’s director.
Finally, with private sector profit growth still above 6%, the rate-setting MPC will be more cautious in cutting interest rates. Wages won’t be the only factor determining when and by how much borrowing costs will fall this year, but they are an important part of the mix.