Home » Buoyant UK labour market data belies rise in long-term sickness

Buoyant UK labour market data belies rise in long-term sickness

On the face of it, Britain’s labour market is in rude health. Employment rose in the final three months of 2023 and unemployment fell to 3.8%. Earnings, adjusted for inflation, rose for a sixth successive month. All are traditionally signs of strength – not an economy that may well have been in recession in the second half of last year.

Scratch beneath the surface and things look less rosy. The latest bulletin from the Office for National Statistics (ONS) reveals that one reason the jobs market is running so hot is because of a lack of workers caused by long-term ill-health. The number of people inactive for health reasons was 2.8 million by the end of 2023 – a rise of more than 200,000 on the year and a jump of 700,000 since before the Covid pandemic. In a literal sense, this is a sick economy.

The absence from the labour market of so many potential workers has consequences. There are still a high number of job vacancies, even though the economy has been flatlining for the best part of two years. While vacancies have been on a downward trend throughout this period, at 932,000 they are still above pre-Covid levels.

Employers are also trying to plug the gap by employing more people from overseas. The number of UK-born workers decreased by 312,000 between the fourth quarter of 2022 and the fourth quarter of 2023, while the number of foreign-born workers rose by 405,000.

Even so, the labour market remains tight and that is reflected in pay. As with vacancies, the rate of earnings growth is coming down – but not as quickly as the Bank of England and the financial markets have expected.

Regular private sector wage growth – which is closely watched by Threadneedle Street’s monetary policy committee (MPC) – was 6.2% higher in the three months ending in December than in the same period a year earlier. That was down from 6.6% in the three months to November but above the Bank’s forecast of 6%.

There are a number of obvious conclusions from the ONS data. One is that employers will oppose measures that would sharply cut the flows of migrant workers into the UK.

A second is that there will be pressure on Jeremy Hunt to use next month’s budget to announce measures to tackle long-term sickness. The chancellor may be tempted to tighten benefit rules but was warned against doing so by the Work Foundation, which said welfare cuts risked pushing those dependent on universal credit into low-paid insecure work that would make their underlying health conditions worse. More carrot, less stick was the advice from Ben Harrison, the thinktank’s director.

Finally, with private sector earnings growth still running above 6%, the rate-setting MPC is going to be more cautious about cutting interest rates. Wages will not be the only factor in deciding when and by how much borrowing costs come down this year but they are an important part of the mix.