UK pay growth stalls amid challenging labour market

The latest employment figures from the Office for National Statistics (ONS) for the period of May 2023 to July 2023 reflect an economy wrestling with persistent economic challenges. These figures reveal a decrease in the employment rate compared to the previous quarter, coupled with an increase in unemployment and economic inactivity rates.

Key highlights from this period include a UK employment rate of 75.5%, down by 0.5% compared to the previous quarter. Simultaneously, the UK unemployment rate for the same period stood at 4.3%, marking a 0.5% increase from the previous quarter.

During the period from June to August 2023, job vacancies experienced a continuous decline for the 14th consecutive quarter. Vacancies plummeted by 6% compared to the period from March to May 2023, with reductions spanning 13 out of 18 industry sectors.

Kate Meadowcroft, employment partner at DWF, noted that pay rates have finally caught up with rising costs. She said, “In May to July 2023, annual growth in regular pay (excluding bonuses) reached 7.8%, mirroring the previous quarter and marking the highest annual growth rate in regular pay since records began in 2001. According to the ONS, this signifies that real pay for individuals is no longer falling.”

Many employers are now compelled to increase pay in order to remain competitive, attract, and retain top talent. Additionally, Meadowcroft emphasized the significance of workplace culture and employee engagement as crucial strategies in talent acquisition.

With political party conferences scheduled for next month, there is a growing interest in potential policies that could impact the labour market.

Commenting on the ONS labour market figures Jon Boys, Senior Labour Market Economist for the Chartered Institute of Personnel and Development (CIPD)  said “Although headline regular pay stayed at a record high of 7.8% those who dig below the headlines will find a different story in the alternative pay data in the form of PAYE estimates from HMRC. These timelier estimates suggest nominal pay may have peaked in June.”  

Overall, Boys said, the labour market is exhibiting fewer job vacancies and more people unemployed, particularly among students and those experiencing long-term sickness. This cooling trend in the labour market may deter potential interest rate hikes by the Bank of England.

Boys added, “Rising sickness is becoming a persistent theme in the post-pandemic UK population, with record levels of people recorded as inactive due to long-term sickness. The rise in inactivity is a symptom and the rise in sickness is the cause. This highlights the important interplay of health and employment policy. Both policymakers and employers should have a bigger focus on occupational health to stop people falling out of work in the first place. Employers must also take note of the effects of stress at work. This entails good job design and managing workloads effectively.”

Bar Huberman, Content manager, HR strategy & practice at XpertHR, added his comments, saying, “Today’s data highlights the struggles businesses are still facing in hiring the right candidates. Throughout the year, permanent hiring has slowed, and this can be attributed to the growing sense of economic uncertainty over the last 12 months, but another concern is the ability of organisations to fill positions with appropriately-skilled individuals. The XpertHR annual recruitment survey found that over three-quarters of businesses grapple with candidate skills shortages and failing to address this head on will only lead to longer recruitment cycles in the future.

“During periods when the labour market is tight, we encourage our customers to turn their attention towards existing members of staff. It is all about a shift in mindset away from recruiting candidates to fill job vacancies, towards training current employees and broadening skillsets across the organisation. This approach will not only provide agility and save on recruitment costs, but by placing an emphasis on learning and development businesses will see a marked improvement in employee retention, avoiding vacancy challenges in the future.”