Stronger than expected wage growth was the key takeaway from today’s statistics, but a slowdown in hiring could be providing a warning of further cooling in the labour market. Economic inactivity due to long-term sickness remains at near record levels, providing an ongoing challenge for policy-makers to improve labour market participation and boosting economic growth.

Good news for workers as wage growth is stronger than expected

This month’s figures had some good news for workers, with regular pay growth up by 5.6% on the year. This is above inflation, resulting in a real term increase in average pay of 2.5% and continues to improve living standards after the impact of high levels of inflation in 2022 and 2023. Furthermore, the gains appear to be spread across industries, with the exception of the public sector, where pay lags at 4.1% on the year.

However, what the data can’t tell us is in what kind of jobs or at what level of jobs pay growth is concentrated. It might indicate that businesses are increasing pay in order to retain workers, or that they are offering higher wages to entice recruits to join.

Employment levels are stable but vacancies are down

The ONS are still facing ongoing reliability issues with the Labour Force Survey, but this month’s figures indicate that the employment rate has decreased slightly on the quarter to 74.8%. This is largely unchanged from the year before. At the same time, unemployment has increased on the quarter from 4.1 to 4.4%. This is not a great change from quarter to quarter, and it remains low in historical perspective. In this case it appears partly due to the slight contraction in employment, but also partly due to people moving from economic inactivity, meaning where they are not in work and not looking for work, and starting to actively looking for jobs.

In the meantime, the number of open job opportunities matters for jobseeker’s ability to obtain work. Although the number of vacancies have continued to decline for two and a half years, this has mostly corrected for the unusually high numbers we witnessed in the wake of the pandemic when there was one vacancy for every person in unemployment.

The number of vacancies still remains higher than pre-pandemic. This signals that currently hiring is still strong, although it is worth keeping an eye on the trend, particularly in the context of an increase in employer National Insurance Contribution and an uplift to the National Minimum Wage and National Living Wage in April 2025. Recent Bank of England polling suggests that this may lead some employers to reduce workers hours or overall numbers.

Figure 1: Vacancies have declined, but remain strong

Source: Work Foundation calculations of ONS data (21 January 2025), using A01: Summary labour market statistics -Table 19: Vacancies 1 by size of business (seasonally adjusted).

Inactivity due to long term sickness remains high

Overall levels of inactivity have gone down slightly. However, this is largely driven by a reduction in those who were inactive to care for family or the home, or because they were students. A more concerning and persistent issue highlighted by the data is that 2.81 million people are inactive due to long term ill health. This is the 18^th consecutive month that this number has risen above 2.7 million to unprecedented heights. Many of those who are inactive do want work, but some may be too ill, or as we find is often the case, few jobs are suitable for those who need additional flexibility to manage their health.

It is clear that the proposals in the Government’s Get Britain Working White Paper will be important to help more people into employment. Government plans to focus on providing support for those who are out of work and not looking due to ill health, and aiming to integrate this with the NHS and the wider health care system. Certainly, the aim to deploy extra capacity and reduce waiting lists is important, as our recent research found that intervention in the first year after the onset of ill health is key in retaining people in work.

However, rather than looking only at the factors that can ‘push’ people from inactivity into the workforce, we must also examine factors that may function to ‘pull’ them in. Flexible working is key in this, such as job share, working from home, annualised hours, and part-time work. For many, flexibility at work is not a ‘nice to have’, but an essential requirement for their ability to enter into, and remain in work.

It is therefore concerning to see the recent push-back from some employers on hybrid and remote working. Calls to roll back access to flexible work are unhelpful, and risk undoing some of the gains that have been made in this area since the pandemic.

Of course, the move to a more hybrid world presents challenges to some employers and their ways of working. Managers especially need the right support and training to manage hybrid teams. But it also provides opportunities — potentially widening the pool of people businesses can recruit, and it has been shown to have positive impacts on motivation and retention. Most importantly, flexible working forms an integral part to Government’s Employment Rights Bill and its ambition to bring to support those outside back into employment.

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