Wage growth slows as number of people employed falls

Compounding concerns about the economic landscape, the number of people on company payrolls experienced a substantial decline, falling by 135,000 in the three months leading up to November. This contraction was particularly pronounced in sectors traditionally reliant on seasonal employment, such as retail and hospitality. The decrease is particularly striking given that it occurred as the economy was approaching the crucial Christmas season, a period when businesses typically ramp up hiring to meet increased consumer demand. The unexpected dip in employment during this peak season suggests underlying fragilities in the labour market, potentially reflecting cautious business sentiment or a broader weakening of consumer spending power.

The average wages, excluding bonuses, saw a slight but significant slowdown, dropping from a 4.6% rise recorded between August and October to the current 4.5%. This trend, while seemingly minor, carries considerable weight for economic policymakers. Sanjay Raja, chief UK economist at Deutsche Bank, highlighted the "really encouraging" implications of easing pay growth for the likelihood of future interest rate cuts by the Bank of England. Raja acknowledged the counter-intuitive nature of celebrating lower pay growth, explaining on the BBC’s Today programme, "But for a Bank of England that’s trying to control inflation… that is good. It allows the Bank to be more comfortable with the future path in terms of inflation getting back to that 2% target."

The primary objective of the Bank of England is to maintain price stability, with a target inflation rate of 2%. Inflation, which measures the pace of price rises across the economy, had eased to 3.2% in November, down from 3.4%. The ONS was poised to release further data for December, which would provide more clarity on the trajectory of price increases. Higher pay growth is typically a key driver of inflation, as increased household incomes lead to greater demand for goods and services, enabling businesses to raise prices. To counter such inflationary pressures, the Bank of England typically raises interest rates, making borrowing more expensive and thereby cooling economic activity. Conversely, a slowdown in wage growth signals reduced inflationary pressure, providing the central bank with greater flexibility to cut interest rates, stimulating demand and supporting economic growth.

The article suggests that after a period of robust interest rate increases aimed at curbing persistent inflation, the Bank of England had already commenced a phase of monetary policy easing. According to the reported timeline, borrowing costs were notably trimmed in December from 4% to 3.75%, following what is described as six cuts since August 2024, marking a significant pivot in the central bank’s approach. This shift indicates a growing confidence among policymakers that inflationary pressures are subsiding sufficiently to warrant a less restrictive monetary stance. However, despite these reported shifts, economists widely expect the Bank of England to maintain current borrowing costs when its rate-setting committee convenes for the first time this year in February, signaling a cautious approach to further easing amidst ongoing economic uncertainties.

A stark divergence in pay growth between the public and private sectors was a prominent feature of the ONS data for the three months to November. Annual average public sector pay growth surged to 7.9%, significantly outpacing the private sector’s modest 3.6%. Liz McKeown, director of economic statistics at the ONS, underscored this disparity, stating, "Wage growth in the private sector has slowed to its lowest rate in five years, while public sector wage growth remains elevated reflecting the continued impact of some pay rises being awarded earlier than they were last year." This difference highlights varied pressures and policy responses across the economy. Private businesses, facing potentially tighter profit margins and uncertain consumer demand, have been more restrained in salary increases. Meanwhile, public sector pay rises, often influenced by government policy, union negotiations, and efforts to address recruitment and retention challenges, appear to have maintained a stronger momentum, albeit with the ONS noting a timing effect. This gap could have implications for labor mobility and the perceived fairness of pay across different employment sectors, potentially exacerbating recruitment difficulties in parts of the private economy or creating public debate around fiscal sustainability.

Adding to the overall picture of a weakening labor market, the unemployment rate remained stubbornly high at 5.1%. This figure represents the highest unemployment rate since early 2021, a period when the UK and the rest of the world were still grappling with the severe economic fallout of the Covid-19 pandemic and extensive national lockdowns. The persistence of elevated unemployment, combined with slowing wage growth and falling payroll numbers, paints a challenging outlook for households. It suggests a tightening job market where finding new employment or securing better-paid positions is becoming increasingly difficult. This situation could lead to reduced consumer confidence, tighter household budgets, and a further dampening of overall economic activity.

The confluence of these economic indicators presents a complex challenge for policymakers. The slowing of private sector wage growth, while welcome for inflation control, coupled with falling employment, suggests a delicate balancing act. The Bank of England must weigh the benefits of easing monetary policy to support economic growth against the risk of inadvertently reigniting inflationary pressures. For businesses, the landscape is one of cautious hiring and cost management, particularly in consumer-facing sectors like retail and hospitality, which are vital for economic dynamism. Households, on the other hand, face the dual pressures of a weakening job market and ongoing cost of living concerns, even as inflation moderates. The trajectory of the UK economy in the coming months will heavily depend on how these intertwined factors evolve, with particular attention on upcoming inflation data and the Bank of England’s future interest rate decisions. The resilience of the UK’s labor market and consumer spending will be critical in determining whether the economy can navigate these headwinds towards a more stable and prosperous future.