The UK jobs market may still appear buoyant, but it risks a sharp correction as the economy slows, a former senior BOE researcher tells MNI.
The UK risks a sudden surge in joblessness as firms which have kept hiring despite deepening pessimism among businesses and consumers encounter a “Wile E. Coyote” moment and stop recruitment, the Bank of England’s former head of international research Greg Thwaites told MNI.
“We have seen consumer confidence plummet. We haven’t seen labour demand or employment fall a great deal yet,” Thwaites, now at the Resolution Foundation, said in an interview in which he pointed to the danger that the labour market and employment could find themselves suspended over thin air in a similar manner to the classic cartoon character as the economy falls away beneath them.
“One of the big uncertainties I have is whether that is just a few months down the road or whether something else is going on,” he added.
With the latest data showing pronounced falls in economic activity, it would be historically typical for the labour market to catch up a few months later, he said.
“It could be that that is what we are seeing, or it could be the fact that vacancies are so high, the labour market is so tight, that it can cool a bit, and people can still find their way into work because there are still 1.3 million vacancies to fill,” he said.
Vacancies have for some months matched or exceeded unemployment levels, but skilled workers are in short supply. Participation rates, which fell during the Covid pandemic, are rising, perhaps as more people seek work to cope with higher prices. (See MNI INTERVIEW: Great Resignation Arrives In UK, Saps Workforce)
COST OF LIVING DRIVES PARTICIPATION
“We have seen participation in the labour force increase for a few months now and reverse part of the fall that we saw since the pandemic started, and it is concentrated among particular groups, clearly people over 50,” Thwaites said. “It is easy to think of reasons why it might be happening, principally the cost-of-living crisis."
In the 2010s participation also increased at a time when real wages were declining, he noted, though he added that following Brexit the UK can no longer rely on a flexible flow of workers from the EU. Instead, under the UK’s new migration system, the government lists shortage occupations and sets a pay threshold.
“We have a much more centrally-planned labour market now … that is likely to be a less flexible one. And so one of the things that used to be the case was that if the UK economy was running hot it would naturally suck in labour from the EU and that is going to happen less than it used to,” Thwaites said.
The trajectory of the labour market will be a key consideration for the Bank of England at its meeting next month, though Monetary Policy Committee members disagree on how to gauge its impact on inflation, a calculation complicated by a fall in potential growth caused by factors including the UK’s departure from the EU and demographic ageing.
Thwaites said the MPC would also examine any signs of "real wage resistance. Whether workers try very hard to bargain for higher wages to protect themselves against inflation, leading to a wage-price spiral."MPC member Michael Saunders made similar points about the loss of flexibility in labour supply in his speech at the Resolution Foundation this week, although Governor Andrew Bailey tends to avoid commenting on Brexit.