Employment and wages

The most common pressure on business leaders reported by almost all MD2MD groups is the difficulty of recruiting and retaining staff and the related challenge of rapidly increasing wage and salary expectations.

The great resignation!

Starting with the facts. Vacancies are at a record high. Unemployment at 3.8% is the lowest for nearly 50 years. For the first time ever there are more vacancies than job seekers.

How and why is this and what does it mean? Firstly this situation is not unique to the UK. There is a shortage of people in most advanced economies. It is worse in the UK and worse than in 2019 too. There are multiple factors at play.

The pandemic has changed our ways of working, our spending patterns and our expectations. Which means there are winners and losers. Some jobs are no longer required. Others are more in demand. It takes time for people to redeploy and then to reskill for the new role. So there is disruption.

Where has everyone gone?

This is compounded in the UK at least by more people (21.4%) being economically inactive – not in a job and not looking for one. That’s the highest for 5 years.

The Bank of England suggests a third of this is a consequence of demographics.  People getting older and retiring. The other two-thirds is less clear. There is some evidence that there are more people long term sick, potentially still suffering from physical and mental health consequences from the pandemic.

There may also be positive personal choices as a result of the pandemic. Many have commented on how the pandemic changed their perspective on life so maybe some people have decided that work is less of a priority for them and are in a situation (early retirement/other earners in the household) where they can take the option to do other things.

There is also the awkward combination of Brexit and the pandemic. Maybe EU nationals who were happily working in the UK and planned to stay as permitted and encouraged faced with the pandemic returned to their home country.  And stayed there – many probably planned to return sometime anyway!  Brexit means it is more difficult for their compatriots to come to the UK.  And the new trade deals encouraging others to come here haven’t kicked in yet.

The bottom line is that we have 600,000 fewer workers in the UK than before the pandemic. That 2% smaller workforce accounts numerically for nearly half the 1.3M vacancies.

Read more on the labour market from the ONS

There are two main consequences of this labour shortage.

  • Pay rates will rise.
    – Annual earnings growth rose from 5.6 per cent in the three months to February to 7.0 per cent in March as firms ramped up rewards to keep staff amid a booming jobs market. Employers are being forced to pay more to recruit and retain staff. For example EasyJet offering £1,000 bonuses to cabin crew and still having to cancel flights.

– Inflation will exacerbate this, especially for the able, mobile, usually young workers. I also believe from listening to MD2MD members that young workers behave quite differently to older workers. They understand their value and are prepared to negotiate hard to get their ‘fair share’ of the value they create, and if necessary change jobs quickly to gain pay increases.

– This too has a double impact. Firstly I believe their negotiating power is greater than the power of the unions in the seventies. Once they start to believe big pay rises are the norm, they will maintain the pressure for those rises to continue.  That will create a wage price spiral. That will sustain inflation for longer than the Bank of England believes. See the inflation article linked below.

– Secondly it will accelerate the drive towards automation… with AI and the like in white collar as well as blue collar jobs. In the long term this will be good for the economy. We have struggled as an economy with productivity for well over a decade and I believe the labour shortage will help us begin to address that. See the article on Creative destruction for more comment.

  • The shortage will benefit most those that have scarcer, higher value skills.
    – So the pay gap between well paid and lower paid employees is likely to increase. Alongside other challenges this might cause political, social and economic challenges as discussed in the article “Social divide” linked below.

Finally a footnote. The comments above are referring to absolute pay rises. Underlying pay is currently rising by 5.5% on average. Which sounds good until you compare to inflation running at 9%. So many are facing a pay cut in real terms.

The Bank of England has suggested we face the greatest squeeze on real incomes for 30 years. But note that the ability to resist this squeeze will differ significantly between different groups of people.  Refer to the “social divide” article linked above.