LABOUR
Unemployment to rise due to cost pressures and Iran crisis
The labour market was weakening before the latest energy shock. The hit to business costs and to discretionary spending from higher fuel and energy prices means the unemployment rate is likely to rise over the rest of this year before gradually falling in 2027, keeping a lid on wage pressures.
Higher employment costs hampering hiring
Unemployment has risen steadily from 4.7% in May 2024 to 5.0% in March. Vacancies have fallen to their lowest level since the pandemic. There is now an average of 2.5 unemployed people per vacancy compared to just 1.1 at the start of 2021.
The issue doesn’t appear to be that firms are firing people. Redundancy figures and the claimant count are stable, and the official count of the number of people employed has risen. Instead, firms appear reluctant to hire, meaning job growth is not keeping up with population growth, leading to a gradual increase in the unemployment rate.
The pain is concentrated amongst the young and in low-paid sectors. HMRC payrolls fell by just over 100,000 in the year to March, with job losses in retail, hospitality and administration totalling 122,000, partially offset by a rise in healthcare jobs. While overall unemployment rose by 0.5ppts, the rate for those aged 16-24 jumped from 12.8% to 14.7%, six times the increase in those aged 25-49. In short, those in work are doing ok, but getting a job has become increasingly difficult.
Younger workers always feel a weakening jobs market more acutely, but the recent deterioration looks more likely to reflect tighter employment laws, the soaring cost of employing someone on minimum wage and tepid consumer spending rather than AI displacing jobs.
Looking ahead, higher fuel prices, which simultaneously raise businesses costs and depress consumer spending, will push the unemployment rate up. The risk is that firms under pressure start shedding staff rather than simply not hiring, which would push the unemployment rate even higher.
Weak labour market will prevent inflation busting pay rises
The slack in the labour market, combined with squeezed margins, will limit employees’ bargaining power and make it harder for firms to award inflation-busting pay rises. The tight fiscal environment will also make it difficult for public sector employers to fund higher pay rises.
However, with inflation likely to hit 3.5%, real pay will probably stagnate, meaning another tough year for the cost of living.
