MNI INSIGHT: Shrunk, Sick Workforce Adds To BOE Hike Pressure

Fresh data highlighting constraints on the UK’s ageing and increasingly sickly workforce are buttressing arguments for the Bank of England to tighten monetary policy.

With a first 50-basis-point rate hike of the cycle on the table for Aug. 4, the Monetary Policy Committee is already worried double-digit headline inflation will feed into wage demands in a very tight labour market. Research published this month by MPC member Jonathan Haskel and Bank economist Josh Martin will only deepen those concerns.

They noted that Covid seems to have accelerated a long-term trend towards a less healthy workforce, with the number of working-age long-term sick increasing by 4.1% a year in the two years of the pandemic, up from around an annual 0.5% in the 20 preceding years. Covid not only directly sickened many, and left a proportion with lingering effects, but also crowded out much non-urgent medical care, so that now some 7 million people, 17% of the working-age population, said long-term ailments affected their work, the research showed.

This constrains “labour supply through both lower participation rates and lower average working hours, reducing potential output,” the paper said. Haskel backed 50-basis-point rises at meetings in June and May.

Bank surveys of firms indicate that they expect recruitment difficulties to persist for at least the next twelve months, due to structural shortages of labour and skills, something which will tend to increase workers’ bargaining power.

SECOND-ROUND EFFECTS

Labour market tightness has been on the minds of other MPC members. Chief Economist Huw Pill is monitoring second-round inflation effects on wages from the energy price spike. And fellow MPC member Michael Saunders, who advocated tightening even before the Ukraine war, pointing to negative supply shocks caused by Covid and Brexit, used his farewell speech before he leaves the committee after the August meeting to highlight pressures on the supply of workers, with the prime working age and retirement age groups getting ever closer in size, and as a flexible supply of additional labour is no longer available as a result of Brexit.

More dovish members, though, may still be concerned that the predicted sharp slowing in the UK economy, with the IMF forecasting growth of just 0.5% in 2023, will feed through into a drop in hiring and a substantial undershoot of the inflation target down the line. High inflation may also be pushing some people back to the workforce, with the participation rate recovering over the past few months. (See MNI INTERVIEW: UK Jobs Market Risks "Wile E Coyote" Plunge)

But the Bank's overall assumption is that potential, or non-inflationary, growth has fallen to just 1.2% a year, meaning that even historically weak rates of expansion would add to inflationary pressure. The MPC is also concerned that price rises will be aggravated by projected sterling weakness as other central banks hike even more aggressively.

BOE economists will trawl through the labour market material for the Monetary Policy Report to be released at the next meeting, which should see, according to most analysts, and market pricing, another 50-basis point hike, albeit on a split vote.