Millions of employees are encountering a wage squeeze at a time when the labor market is deteriorating, according to recent data.
Statistics from the Office for National Statistics show that average wage growth decelerated to 3.4% year-on-year in the first quarter of the year. Private sector wage growth dropped to 3%, while the public sector saw a rate of 4.8%.
With inflation rising to 3.3% and expected to climb further due to the economic ramifications of the Iran conflict, experts caution that many workers may experience a decrease in real wages.
Simultaneously, the tightening job market is making it increasingly challenging for workers to negotiate pay raises that keep up with inflation.
The latest ONS figures indicated a slight increase in the unemployment rate to 5%, along with a decrease in job vacancies to 705,000, the lowest level since the onset of the Covid crisis. Excluding the pandemic period, there are currently fewer job opportunities than at any time in over a decade.
In March, the number of individuals in payrolled positions declined by 104,000 compared to the previous year, with estimates suggesting a further drop of 210,000 in April. The claimant count for individuals receiving out-of-work benefits increased on a monthly basis but decreased year-on-year to an estimated 1.699 million.
Economist Jack Kennedy from job website Indeed commented that the labor market is showing signs of strain, with decreasing vacancies, declining payrolled employment, and a rising unemployment rate reflecting the pressure on businesses from escalating costs and uncertainty.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, noted that these figures indicate growing distress within the UK labor market as businesses react to soaring labor costs and fallout from the Iran conflict by scaling back recruitment and constraining wage increases.
Chief economist at KPMG, Yael Selfin, predicted a period of declining real wages for workers as inflation is projected to outpace earnings, driven by higher energy and food prices. Unlike the energy shock of 2022, the weakened labor market is expected to limit workers’ ability to secure higher pay to offset the rising costs.
Economists suggest that the slowdown in wage growth may lead the Bank of England to maintain interest rates at the current level in the following month.
Julia Diniz, an economist at the Resolution Foundation, highlighted the challenging state of the UK labor market, with unemployment at 5% and real wage growth stagnating at zero, indicating a potential period of declining real wages as inflation is projected to rise.
Diniz also noted that despite the weak labor market, the UK is less likely to witness wage-price spirals akin to those following Russia’s invasion of Ukraine, which should give the Bank of England reason to pause before considering interest rate hikes.
