Record lows in unemployment and record highs in long-term sickness poses huge challenge for policymakers

A tight labour market has seen pay growth strengthen and unemployment fall to a near-50-year-low. But the workforce continues to shrink, driven by economic inactivity due to long-term ill-health.

However, with inflation remaining close to a 40-year high, real pay packets continued to shrink. Real pay is expected to continue shrinking which in time will mean it will have fallen back to its 2003 level.

Read all the statistics here.

Main Points

The UK employment rate for June to August 2022 was 75.5%, 0.3 percentage points lower than the previous quarter (March to May 2022), which had a notably higher employment rate than other periods. The number of employees decreased on the quarter, while self-employed workers increased. The employment rate is 1.0 percentage points lower than before the pandemic.

The most timely estimate of payrolled employees for September 2022 shows another monthly increase, up 69,000 on the revised August 2022 figures, to a record 29.7 million.

The unemployment rate for June to August 2022 decreased by 0.3 percentage points on the quarter to 3.5%, the lowest rate since December to February 1974. The number of people unemployed for between 6 and 12 months increased on the quarter, while there were decreases for the short-term (up to 6 months) and long-term (over 12 months) unemployed. In June to August 2022, the number of unemployed people per vacancy fell to a record low of 0.9.

The economic inactivity rate increased by 0.6 percentage points to 21.7% in June to August 2022, compared with the previous quarter (March to May 2022), which had a notably lower economic inactivity rate than other periods. This increase in the latest quarter was largely driven by those aged 50 to 64 years and those aged 16 to 24 years. Looking at economic inactivity by reason, the quarterly increase was driven by people inactive because they are long-term sick or because they are students. Numbers of those economically inactive because they are long-term sick increased to a record high.

In July to September 2022, the estimated number of vacancies fell by 46,000 on the quarter to 1,246,000, this is the largest fall on the quarter since June to August 2020. Despite three consecutive quarterly falls, the number of vacancies remain at historically high levels.

Growth in average total pay (including bonuses) was 6.0% and growth in regular pay (excluding bonuses) was 5.4% among employees in June to August 2022. This is the strongest growth in regular pay seen outside of the coronavirus (COVID-19) pandemic period. Average regular pay growth was 6.2% for the private sector and 2.2% for the public sector. Outside of the height of the pandemic period, this is the largest growth seen for the private sector and the largest difference between the private sector and public sector.

In real terms (adjusted for inflation) over the year, total pay fell by 2.4% and regular pay fell by 2.9%. This is slightly smaller than the record fall in real regular pay we saw April to June 2022 (3.0%), but still remains among the largest falls in growth since comparable records began in 2001.

See September’s analysis here.

Resolution Foundation Analysis for Labour Market

A tight labour market has seen pay growth strengthen and unemployment fall to a near-50-year-low. But the workforce continues to shrink, driven by economic inactivity due to long-term ill-health rising to a record 2.49 million, highlighting the dilemma facing policy makers, the Resolution Foundation said today (Tuesday) in response to the latest ONS labour market statistics.

The latest labour market data described a tight labour market, with unemployment falling to its lowest level since February 1974, and nominal regular pay growth strengthening to 5.4 per cent (6.2 per cent in the private sector) – the strongest level of wage growth outside of the pandemic period since records began in 2000.

However, with inflation remaining close to a 40-year high, real pay packets continued to shrink, and are expected to keep shrinking until the second half of next year, by which time typical real pay will have fallen back to its 2003 level.

And while unemployment is falling, so too is employment, as the workforce continues to shrink. Economic inactivity rose to 21.7 per cent in the three months to August, driven by older workers exiting the labour market (workers aged 50+ accounted for 74 per cent of rising inactivity since January 2020) and by rising long-term ill-health among those aged 16-64, which has hit a record high of 2.49 million.

These trends of strengthening pay growth and high inactivity present a challenging climate for fiscal and monetary policy makers, says the Foundation.

High levels of economic inactivity pose a challenge to the Government’s growth agenda, given that growth in the 2010s was driven in large part by rising employment.

Strengthening pay growth in the private sector relative to the public sector – the gap is at its highest level since records began, outside of the pandemic period – will also pose a challenge for the Treasury as it seeks to hold down public sector spending as it seeks to part-fund its tax cuts.

Strengthening pay growth also forms part of the already huge pressure on the Bank of England to raise interest rates as it seeks to tackle entrenched inflation.

Institute for Employment Studies Analysis

At just 3.5%, the last time unemployment was this low was when Slade released Merry Christmas Everybody. But if that counts as good news, there’s really very little else to welcome today. The employment rate has fallen again on the previous quarter, down by 0.3 percentage points to 75.5%, while ‘economic inactivity’ (the measure of those not in work and either not looking and/ or not available to work) has risen by a 0.6 points to 21.7%. Apart from the rise in economic inactivity during the first lockdown, this is the largest quarterly increase since comparable records began in 1971.

Higher economic inactivity continues to be driven particularly by fewer older people in work – who account for three quarters of the total rise – and by more people out of work due to long-term health conditions, which has again seen a record quarterly rise and reached its highest level in at least thirty years (at 2.49 million). However economic inactivity due to caring for family and home is also rising after three decades of sustained falls, which may well reflect more parents (and particularly single parents) struggling to find or stay in work; while student numbers are rising again, and the number of people citing early retirement has also edged up. So overall the labour force is contracting in many different ways, and is now half a million smaller than it was before the pandemic.

This is happening in spite of (and is likely contributing to) continued very high vacancies – which remain above 1.2 million. There simply are not enough workers for the jobs available. This is likely contributing to very strong nominal pay growth, which is now running at 6.4% in the private sector but at just 2.4% in the public sector, which is in turn likely to be contributing to rising prices – with services inflation and core inflation (which excludes energy and food costs) both now running at around 6%. Overall however, this high nominal pay growth is still below the (even higher) rate of inflation, so real pay continues to fall (by 2.8% year-on-year in today’s figures).

As with last month, there are some early signs that demand may be starting to weaken in the private sector, with vacancies falling slightly from their peaks in a number of industries. However vacancies are continuing to grow in the public sector – likely in part reflecting more people leaving public sector jobs for better paid work in the private sector, as well as continued struggles to recruit new staff in a highly competitive labour market.

Overall these are pretty worrying figures and an inauspicious backdrop against which to be looking for tens of billions of pounds of cuts to public spending. Perhaps the best (but least likely) course that the government could take would be not to make those cuts and instead delay its tax plans. Failing that though, we would argue that there are now four key priorities for the Chancellor’s statement at the end of this month: to extend the Restart Scheme, which is due to underspend by around £1.2 billion; to do far more to improve access to specialist health and work related support; to ensure a decent settlement on public sector pay and reform; and to increase investment in skills and training, particularly for those out of work.

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Sector Response

The Chancellor said:

“Countries around the world are facing economic challenges, but today’s statistics remind us that the fundamentals of the UK economy remain resilient, with unemployment at its lowest point for almost 50 years.

“Our ambitious Growth Plan will drive sustainable long term growth, meaning higher wages and better living standards for everyone, and we are cutting taxes so people can keep more of what they earn.”

“But we know people are concerned about rising prices and that’s why we’re standing behind families with our Energy Price Guarantee, saving the average household £1000 a year for the next two years.”

Additional information:

• Someone earning £30,000 a year will be almost £400 a year better off thanks to our tax cuts.

DWP Minister of State, Victoria Prentis MP said:

“Today’s figures show the strength of our labour market; our unemployment rate remains at a near record low and there are a high number of people on payrolls. To support economic growth it is vital we encourage workers into the labour market, making the most of the skills and experience this country holds whilst tackling the barriers jobseekers face.

“We recently made changes to Universal Credit and our older workers’ offer so even more claimants receive intensive support from a dedicated Work Coach, to help them not only get into work, but also to seize opportunities and increase their job prospects and pay.

“We are committed to looking after the most vulnerable which is why we are delivering at least £1,200 of support to families this winter while also saving households an average of £1,000 a year through our Energy Price Guarantee.”

Tony Wilson, Director at the Institute for Employment Studies said:

“The last time unemployment was this low was Christmas 1973 and Slade had just reached Number 1.  But despite this record low unemployment, there are still more than a million unfilled jobs and over than half a million more people out of work than before the pandemic began.  This is being driven in particular by an alarming growth in economic inactivity due to long-term ill health, which is up by 170 thousand in the last three months alone and has reached its highest figure in at least three decades (2.49 million).

“The Chancellor now has three months to come up with a plan to address this.  Virtually none of those who have left the labour market are on unemployment benefits and most aren’t even on benefit at all.  So the focus  needs to be on how we can do much more to help people back into work instead of threatening to cut their benefits.   A good place to start would be by extending access to the Restart Scheme, where government now expects to spend £1.2 billion less than it forecast a year ago.  This investment will likely more than pay for itself in the longer run and not using it would be a complete false economy, reducing access to services for people out of work in order to fund tax cuts for those better off in work.”

Pawel Adrjan, Director EMEA Economic Research at the global job site Indeed, said:

“The labour market simply cannot get back on its feet after the pandemic. The employment rate is down for a second consecutive month and still has not recovered to its pre-pandemic level, while the number of economically inactive working-age people has risen to its highest since 2015.

“The continued rise in inactivity makes the UK an international outlier with long-term illness a major contributing factor pointing to a growing in-tray for the new health secretary. The labour force participation crisis keeps pulling us away from full pandemic recovery.

“The labour market simply isn’t attracting the number of workers it requires, resulting in a severely challenging outlook for employers at a time when the number of unemployed people per vacancy fell to a record low of 0.9. Despite a weakened economic outlook, there are still more job openings than unemployed people.

“Policy makers have so far resisted the urge to relax immigration rules to allow more foreign workers into the workforce to help release mounting staffing pressures. But with ‘growth, growth, growth’ top of the political agenda, immigration is one lever they could reach to increase the supply of workers. 

“As a result of the tight labour market we’re seeing the strongest growth in regular pay outside of the pandemic period, 6.0% growth including bonuses and 5.4% excluding. But with inflation sitting at over 10%, pay packets remain squeezed. Private sector pay growth (6.2%) is near triple that of the public sector (2.2%), which makes for sombre reading given the likely nurses’ strike action over pay and staff shortages.”

TUC General Secretary Frances O’Grady said: 

“Every worker deserves a decent standard of living. But pay packets continue to be eaten up by inflation.

“Millions of families face a bleak winter unless we get wages rising across the economy.

“Instead of handing out bungs to bankers and big business, the government should be focussed on getting money into workers’ pockets.

“That means lifting the minimum wage to £15 an hour as soon as possible, funding decent pay rises for all public sector workers, and allowing unions to go into every workplace to negotiate proper pay rises for all working people. 

“That’s the best way to jumpstart our economy and to deliver sustainable growth.”

Ben Harrison, Director of the Work Foundation at Lancaster University, a leading think tank for improving working lives in the UK:

“Today’s ONS data shows that employers are struggling to fill vacancies as unemployment hits a 48-year low. We are still seeing increasing numbers not looking for work due to long-term sickness – and 107,000 extra 50-64 year olds are no longer looking for work compared to the previous quarter.

“The Government is right to focus on driving growth in the economy, but it cannot do so without tackling the UK’s participation issue. If the Prime Minister is to be true to her word on ‘taking tough decisions’, her administration should drop the rhetoric on benefit claimants needing to work harder and instead focus the full power of Government to support those who have dropped out of the labour market, including those not receiving Universal Credit.

“A cross-agency Participation Taskforce should be established to address the complex underlying health and social issues to help support more people back into work. Without targeted action, labour shortages will impact the UK economy’s prospects of growth.”

Louise Murphy, Economist at the Resolution Foundation, said:

“A tight labour market is delivering stronger pay growth and reducing unemployment to a near 50-year low. But at the same time, more older workers in particular are leaving the jobs market altogether as inactivity due to long-term ill-health reaches a record high of 2.49 million.

“High inactivity and strengthening pay growth present huge challenges for monetary and fiscal policy makers as they seek to cool inflation, boost growth and put the public finances on a sustainable footing.”

Alun Baker, CEO of wellbeing and performance expert GoodShape:

“The health of UK employees is getting worse. The amount of time people take-offwork each year, due to ill health has increased 51% in the last five years, from around four days in 2017 to just over six days in 2021.  And on average, 1% more of the country’s workers (350,000 people) are absent from work at any time now compared to five years ago. Staggeringly, more than five in ten people who take two mental health-related absences will go on to leave their job.”

“All of that absence adds up to billions in costs to UK businesses – we estimate more than £43 billion in 2021, and that’s without the related costs of admin and replacement workers.”

“Something isn’t working, and the health of our workforce is declining. There needs to be a wholesale shift in the way businesses look after and invest in their people. Without this, they are simply treating the symptoms of illness and not addressing the root causes of time off.”