Note: Due to the increased volatility of the Labour Force Survey estimates, interpretations of the data in this blog must be treated with caution

This month’s labour market statistics point to a weakening jobs market, despite the UK economy growing again after a short recession.

Employment is down by 0.5 percentage points on the quarter while unemployment and economic inactivity are estimated to have risen by 0.5 and 0.2 percentage points respectively over the same period. Vacancies have also fallen for the 22^nd consecutive period which reflects employer uncertainty about the future health of the economy. These headline indicators signal that the labour market is heading in the wrong direction.

Pay growth remains strong

Despite signs of the labour market cooling, pay growth remains high with nominal regular pay growth at 6%. With inflation falling, this equates to an increase in real earning of 2% on the year. Pay growth was driven by pay increases primarily in financial and business services as well as manufacturing sector. However, the wholesale, retail and hospitality sectors also saw a nominal earnings increase of 6.1.%. This is particularly welcome as insecure work tends to be concentrated in these sectors. While the strong pay growth is encouraging, it is unlikely to be sustainable in the medium to long term given the labour market continues to cool.

Long-term unemployment a particular concern

Unemployment is estimated to have increased to 4.3% which is the highest level since May-June 2023. There are now 1.44 million people actively looking for work with more than one in five (22.2%) unemployed for over 12 months. Worryingly, long-term unemployment among young people remains stubbornly high: there are now an estimated 82,000 young people who have been unemployed for over 12 months which is an increase in five percentage points compared to last year.

Long-term unemployment for people aged 25-49 has also increased with nearly one in four (24.1%) in unemployment for over 12 months. Long periods of unemployment can lead to scarring effects which makes finding new jobs more difficult and inhibits career progression opportunities in the future. Research from LSE has highlighted the harmful effects that unemployment can have on the mental and physical health of young people in particular.

Inactivity due to long-term sickness continues to rise

The number of people economically inactive (those out of work and not looking for work) is estimated to have risen again by 105,000 on the quarter. Nearly a third (30.1%) of the inactive population is inactive due to long-term sickness. Inactivity due to long-term sickness now stands at 2.82 million which is a near-record and a staggering increase of over 700,000 compared to the pre-pandemic level (Nov 2019 -– Jan 2020). Over the last year alone, on average, 295 people per day have become inactive due to long-term sickness.

Figure 1: Long-term sickness drives the overall growth in inactivity

Source: Office of National Statistics labour market data A01: Table 11 (May 2024)

“Sick note culture” clampdown unlikely to improve labour market outlook

The Government recently announced changes to the fit note process. Under the proposed plan, GPs will no longer have the authority to issue sick notes. Instead, “specialist work and health professionals” will make an objective assessment on what individuals can do. These proposals are part of an attempt to curb a so-called “sick note culture”.

However, this month’s labour market statistics undermine the claim that a sick note culture is driving the worsening labour market outlook. Rising long-term unemployment suggests that people actively looking for work are struggling to find suitable employment opportunities. More than one in three (36.7%) people who are inactive due to long-term sickness want a job. The central challenge facing policymakers is how to support people back into work. The Government must focus on rolling out its Back to Work Plan, centred around boosting health and employment support, as tackling the problem of rising worklessness is likely to hinge on its success.

The road ahead

The workforce has continued to shrink since the pandemic and has not returned to pre-pandemic levels making the UK an international outlier. However, we now also see a fall in labour demand as vacancies continue to fall while unemployment rises. Therefore, while pay growth remains robust for now, it is likely to slow as the year progresses which increases the likelihood of the Bank of England cutting interest rates in the summer.

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