Britain’s jobs market is booming: wages are going up and there are lots of vacancies out there.
But the cost of living is surging too.
If we’re hoping for the economy to do well this year, one of these things has to outpace the other.
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And unfortunately, the latest jobs data doesn’t make it any clearer exactly which is winning.
The jobs market is booming, but real wages are flat
The latest data on UK job growth is mixed.
The jobs market is extremely strong, there is no doubt about that.
Employment is now above pre-coronavirus level across the UK, according to the latest reading from the Office for National Statistics (ONS). The number of payrolled employees was up to 29.5 million in December 2021, which is nearly half a million more than in February 2020.
The unemployment rate has fallen to 4.1%, while the number of job vacancies out there is up to 1.2 million, a new record. The rate of growth in vacancies has slowed, but, at that level, it’s not really surprising.
So that’s all good news.
On the less good side of things, weekly earnings growth is slowing. Weekly earnings were up 4.2% year on year in the quarter to the end of November 2021, or 3.8% excluding bonuses. That sounds like a lot compared to wage growth in previous years – it’s the highest it’s been since before the 2008 financial crisis.
But when you take inflation into account that, over the same period, employees are no further forward than where they started. In “real” terms, including bonuses, wages are up just 0.4% year on year, and without bonuses they’re flat.
And this can’t be blamed on “base” effects, because those are pretty much out of the data now.
Moreover, the ONS data likely understates the impact of cost of living increases on most people. I’m not being all “conspiracy theory” here – it’s very hard to measure exactly how inflation affects most people and we all have individual rates of inflation to an extent.
But the gap between the official inflation measure (CPI) and the no-longer-official-but-still-used-for-some-important-stuff measure (RPI) is growing ever larger, and I’ll bet that most worker’s individual inflation rates are sadly closer to RPI than CPI. (For more on the difference between those two, here’s a short explainer on RPI vs CPI).
In short, there are loads of job vacancies and wages are rising, but costs are rising at least as fast as wages, so no one is better off (and, to add weight to the gloomy side of the ledger, this is all happening before the worst of our energy crisis has fed through to people’s pockets).
Will weak wage growth hit the economy, or will wage growth pick up?
So what does all of this mean? It leaves things pretty finely balanced. Are we going to see a cost-of-living crisis which overwhelms consumers and leaves them pulling back on their spending, which in turn hits company revenues, which in turn hits hiring – a nasty slide into recession?
Or will we see people demand higher wages, which companies will recoup from consumers in the form of higher prices? Or will we see workers revert to what they did in the years before the financial crisis – rely on home equity and credit card debt to maintain consumption levels?
This is a difficult question, by which I mean I think it could go lots of different ways. But my hope – and my hunch – is that things are going to be different this time (dangerous words, I know).
First, it’s important to realise that the jobs market really is hot right now. Recruiters have every reason to hype up the tightness of the labour market. Just as an estate agent will err on the side of optimism when it comes to the price of houses, so a recruiter will err on the side of optimism when it comes to the price of employees.
But there’s no doubt that business is booming for them, as we discussed earlier this month. And you need only glance across corporate reports in the last six months or so to see that recruitment is a genuine problem for lots of different companies and that they are willing to pay up to hire (or keep) the right staff.
As long as companies feel under pressure to hire and also confident of being able to pass on costs then this should continue.
Secondly, I’m also hoping that with Omicron being less of a problem than some had feared before Christmas, that this year we’ll all retain enough of our desire to get back to “normal” that the desire to consume won’t be overwhelmed by a fear of the energy bill. The “wealth effect” of rising house prices will help with this to an extent.
Finally, on that point about energy prices, it’s hard to see politicians not trying to take the edge off rising costs – they’re frantically scrambling for solutions right now. None of the solutions will be sensible for the long run, but if they mitigate the rise somewhat, it adds to the case for consumption continuing as usual.
What does it mean for your money? At the end of the day, UK stocks are cheap. So from that point of view, I wouldn’t be overly concerned about the investment case. We’ll get more of a warning about which way it’s all going in the next few months.
But when it comes to your personal finances? The rate of inflation is out tomorrow, and that’ll probably have a bigger effect on the Bank of England’s next move on interest rates than this data. So we’ll discuss that in tomorrow’s Money Morning.
As for paying your energy bill – if you’re an employee, you maybe need to take my colleague Merryn’s advice, and ask for a pay rise.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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