Growth of employment and vacancies appears to be levelling off. So what does this mean?
The UK labour market may be near a turning point. The latest figures from the Office for National Statistics showed signs of softness, with the unemployment rate edging up for the first time in over a year in April. Growth of employment and vacancies appears to be levelling off. With inflation headed towards double-digits for the first time since the early 1980s, the economic outlook is darkening.
Similar bleakness was seen in the UK Purchasing Managers’ Index, which sank to a 15-month low in May, while consumer confidence dropped to levels historically consistent with recession. Even if a technical recession – two consecutive quarters of contracting GDP – is avoided this year, the Bank of England among other forecasters expect the economy to stagnate in 2023.
Labour market impact
The labour market tends to lag trends in the wider economy, but weaker growth projections are reflected in expectations for unemployment to start rising in the final quarter of 2022. In calibrating the pace at which it raises interest rates to tackle inflation, the Bank of England hopes to engineer a soft landing whereby vacancies gradually drift down from record levels, rather than an alternative scenario of widespread layoffs.
For now, the labour remains remarkably tight and for the first time on record, there is less than one unemployed jobseeker per vacancy. For employers across a range of sectors, this means a continuation of staffing gaps.
The Bank of England’s regional agents report that hiring difficulties are expected to persist for at least the next twelve months, due to structural shortages of labour and skills. The pandemic’s legacy is a labour market bent out of shape by the turmoil of the past two years. Employers are having to rethink traditional recruitment strategies to try and tap into new and diverse pools of talent. Transferable skills and retraining avenues are key elements to this.
Job growth slowing
Real time data from Indeed indicate that job postings are slowing but remain elevated compared to their pre-pandemic level as demand for staff is high. UK postings peaked in February at 50% above pre-pandemic levels, but have dipped to 40% above the baseline, as of 10 June.
Some categories have boomed while others lag. Job postings in some occupations have reached at least double pre-pandemic levels, including ‘pandemic winners’ like cleaning and distribution categories related to online retail. But a handful of categories stand below pre-pandemic levels, including legal, beauty and childcare.
Aviation job postings had been among the laggards until recently but have picked up sharply as airlines scramble to fill vacancies amid the rebound in international travel. Ground staff are similarly in demand and as a result baggage handler wages have spiked 9% in just one quarter as airports rush to avert widespread disruption over the peak summer season. By contrast, tech hiring has slowed as the weaker economic outlook puts the brakes on the sector’s expansion. Software developer job postings are down notably over the past three months.
Job posting recoveries are also geographically uneven. London has seen the weakest recovery regionally as lower commuter footfall and the drop in international tourism has weighed on face-to-face services jobs in the capital that rely on their spending in shops, cafes and bars.
Places with higher employment shares in sectors like manufacturing, logistics and public sector jobs have outperformed, with a number of towns and cities in the North and Midlands having seen among the strongest job postings recoveries.
In contrast to its peers across major advanced economies, the UK labour market faces a large post-pandemic participation gap. Though economic inactivity showed a small drop in April, it remains 450,000 higher than its pre-pandemic level.
Key drivers are lower participation among younger and older workers. But while younger people are now returning to the labour market having opted to sit out an adverse hiring landscape at the height of the pandemic by staying longer in education, there are few signs of older workers coming back from the sidelines.
Analysis by the Institute for Fiscal Studies highlights a big increase in early retirements among the over 50s possibly caused by reevaluation of preferences and priorities. Many people have perhaps decided that going to work for their previous pay and conditions simply wasn’t worth it any more, at least those with financial means such as a savings cushion, partner’s income or early pension draw down.
Will cost of living pull people back to work?
A key question is the extent to which rising cost of living pressures – and falling investment values – might start to change this picture. In the US, there is some evidence of ‘unretirements’ related to these factors. But in the UK, historical experience suggests that once people retire they rarely return to the workforce. It will be interesting to see which way it plays out this time. Any employers hoping to capitalise on any pick-up in job search urgency among older workers are likely to need to think about how to offer them greater flexibility.
One group unlikely to return to the labour market is those in ill health. The pandemic’s toll on physical and mental health has driven a rise in long-term sickness, which is now the most common reason for inactivity. Employers can no longer easily plug staffing gaps with workers from the EU now freedom of movement has ended.
On the other hand, job-seekers from the rest of the world are increasingly turning their heads towards the UK. That interest is particularly being directed towards higher paid, higher skilled jobs, as the UK government intended. However, that’s little comfort to employers in lower-paid sectors facing the biggest hiring challenges, like hospitality, distribution, retail and personal services, where foreign candidates are unlikely to qualify for a work visa.
Remote work winners and losers
Another dichotomy is around remote work. Interest in remote work from jobseekers shows no sign of running out of steam, with searches for remote terms on Indeed having pushed on to record highs even as the economy has fully reopened. Employers in sectors where remote work is feasible are in a position to capitalise on this interest, but many jobs can’t be done remotely and many in-person occupations have seen relative declines in interest, as measured by fewer average clicks per posting.
While flexibility is important, Indeed’s survey of jobseekers shows that pay remains the number one motivating factor. The incentive to obtain a pay rise is all the stronger at a time of intense cost of living pressures and workers have been taking advantage of a candidates’ market where job switching rates have hit record highs.
Few occupations are seeing pay rising fast enough to keep up with consumer prices though. Acute hiring challenges in hospitality have pushed up advertised wages in Indeed job postings almost 10% year-on-year, while cleaning, warehousing, driving and construction have seen annual increases in the 7-8% range. But across all jobs, advertised wages are up 5.3% year-on-year, well below inflation and spelling real-terms pay cuts for most workers.
Jack Kennedy, Economist, Indeed Hiring Lab