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Investment Institute
Macroeconomics

UK Reaction: April payrolls and March LFS - UK Labour Market continues to tighten

  • 19 May 2022 (3 min read)

  • The UK labour market continues to tighten; unemployment fell to 3.7%, the lowest level since 1974 and for the first time there are fewer unemployed people than job vacancies.
  • The employment rate rose to 75.7% but remains 0.9ppts lower than early 2020 (Dec-Feb 2020). Inactivity continues to add to pressure on the labour market rising further this quarter. 
  • Average earnings (ex bonuses) picked up slightly, increasing by 4.2% in the 3 months to March whilst total pay (including bonuses) jumped to 7% as one-off payments grew.
  • We expect the continued tightness of the labour market will see the MPC deliver rate hikes in June and August. 

The Labour Force Survey (LFS) estimates for January to March 2022 indicated continued strength in the labour market with unemployment falling to 3.7% and for the first time since records began, there are fewer unemployed people than job vacancies. The employment rate rose to 75.7, up 0.1ppts over the quarter, but the rate still remains 0.9ppts below where it was before the pandemic in Dec-Feb 2020. The trend of rising inactivity continued to add pressure on a tightening labour market, with the economic inactivity rate increasing to 21.4%, leaving inactivity 1.1ppts above where it was prior to the pandemic. Recent increases have been driven by those aged 50 to 64 years exiting the workforce. 

Average earnings (ex bonuses) picked up slightly, increasing by 4.2% in the 3 months to March. In real terms this represents a fall in average earnings growth by 1.2% on the year and with inflation forecast to reach over 9% in the coming months this fall in real incomes is set to increase.  Total pay (including bonuses) rose unexpectedly to 7% in the 3 months to March reflecting much higher one-off payments and variation in pay growth between sectors has widened.  

The more-timely HMRC estimates of payrolled employees for April 2022 posted a rise of 121k on the revised March figure (revised up to 59k from 35k), to a record 29.5 million. The number of job vacancies in February to April 2022 also rose to a new record of 1.3m. However, the rate of growth in vacancies continued to moderate – vacancies increased by 35k, the smallest increase since Jan-Mar 2021. 

The UK labour market remains tight; indicators suggest this is beginning to ease as growth in employment and vacancies slows. There remains some scope for tightness to ease over the coming quarters as some of those who exited the workforce during the pandemic begin to re-enter. We expect the Monetary Policy Committee (MPC) to hike rates in June, and we forecast one more rise to 1.5% after that in August. We see the labour market as key to the BoE and suspect that slower growth and a slacker labour market will see them pause. A labour market that remains tight could see the BoE hike more. 

Financial markets reacted to the strength of today’s print with sterling rising by 0.2% against the dollar. 

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