UK unemployment falls to lowest rate since 1974 but pay lags behind inflation

UK unemployment  Workers travel through London Bridge rail and underground station during the morning rush hour in London, Britain, September 8, 2021. REUTERS/Toby Melville
UK unemployment has tumbled to its lowest level in almost 50 years as more people left the workforce. Photo: Toby Melville/Reuters

UK unemployment has plunged to its lowest level since 1974 as more people dropped out of the workforce.

The unemployment rate sank to 3.6% in the three months to July, down 0.2 percentage points from the previous quarter and the lowest since 1974, according to the Office for National Statistics (ONS).

The decline was driven by a sharp rise in the number of people classed as economically inactive or not looking for jobs. Increases in long-term sickness and moves to education meant 194,000 people left the workforce.

The economic inactivity rate climbed 0.4 percentage points to 21.7%, as more people dropped out of the labour market in between May and July. That’s 1.5 percentage points higher than before the coronavirus pandemic.

The data also showed real wages tumbled to their lowest in almost two decades as inflation continued to outstrip pay rises.

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Average pay including bonuses rose by 5.5% per year in the three months to July, while basic pay, excluding bonuses, rose 5.2%.

But, with Consumer Prices Index (CPI) inflation taken into account, real pay tumbled by 3.9% year-on-year, according to the ONS.

Inflation is soaring
Inflation is soaring. Chart: Yahoo

It is one of the worst drops in real pay this century, according to the ONS.

“Growth in total and regular pay fell in real terms (adjusted for inflation) on the year in May to July 2022, at 2.6% for total pay and 2.8% for regular pay; this is slightly smaller than the record fall we saw last month (3.0%), but still remains among the largest falls in growth since comparable records began in 2001,” the ONS said.

“For many workers, the painful reality is their pay packets are not stretching far enough to cover the escalating cost of living. Despite one the tightest job market on record, soaring inflation, which far outstrips wage growth, has led to the largest pay cuts in real terms,” Myron Jobson, senior personal finance analyst at Interactive Investor, said.

Public sector workers are the ones suffering the brunt of the real wage squeeze.

Average regular pay in the public sector rose by 2% per year in May to July while private sector workers saw their pay rise three times as fast, with average regular pay growth of 6%.

Inflation is currently at a record high, having hit 10.1% in July, fuelled by energy and food costs.

Real pay packets could be squeezed harder in the months ahead as the economy weakens.

“Pay packets continue to be squeezed as nominal pay growth hasn’t kept up with soaring inflation. As long as demand for staff remains high, this could encourage workers to look for better opportunities and secure a higher pay elsewhere,” Yael Selfin, chief economist at KPMG UK, said.

“However, the window of opportunity could soon narrow if employers review their payrolls in light of a deteriorating outlook.”

Read more: UK economy grows slower than expected as higher prices hit growth

The jobs report also shows that firms are also cutting back on hiring, as some fear the UK economy is close to a recession.

The number of job vacancies in June to August fell by 34,000 to 1,266,000, the largest quarterly fall since June to August 2020.

"With firms doing their best to keep afloat during a period of spiralling costs, they are also facing an extremely tight labour market which is further impacting their ability to invest and grow," said Jane Gratton from the British Chambers of Commerce.

"Despite a second month of a decrease in job vacancies, the overall number of vacancies in the labour market remains high. With over 1.2 million unfilled jobs across the country, labour shortages have reached crisis levels for businesses across many sectors and regions.

"During a period of increasing inflation, and a stagnant economy, we cannot afford to let recruitment problems further dampen growth."

TUC general secretary Frances O’Grady said: “Every worker deserves a decent standard of living.

“But as the cost of living crisis intensifies, millions of families don’t know how they will make ends meet this winter.

“The new prime minister must get pay rising. Boosting the minimum wage and giving public sector workers a decent pay rise would be a good start."

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