UK wage growth eases as jobs market weakens

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Wage growth eased in the three months to March and employers cut jobs ahead of steep increases in payroll taxes and the minimum wage, in the starkest signs yet of the strains in the labour market.

Annual growth in average weekly wages was 5.6 per cent, excluding bonuses, in the three months to March, the Office for National Statistics said on Tuesday. The figure was in line with analysts’ expectations and down from 5.9 per cent in the three months to February.

Separate figures showed payroll employment fell by 47,000 or 0.2 per cent between February and March. Preliminary figures for April showed a further drop of 33,000, or 0.1 per cent on the month.

Companies are contending with higher national insurance contributions, a measure introduced in Rachel Reeves’ October Budget and that took effect in April, alongside a rise in the minimum wage.

The retail and hospitality sectors, hit hardest by the changes, had the sharpest falls in employment in March and April.

Figures based on the ONS’s labour force survey also showed an increase in the headline measure of unemployment to 4.5 per cent in the three months to March, from 4.4 per cent in the previous three-month period.

Despite the slowing jobs market Ruth Gregory, at the consultancy Capital Economics, said the still-high wage growth left the Bank of England “in a tricky position” and was likely to reinforce its gradual approach to rate cuts.

“If the jobs market remains weak, then underlying price pressures should eventually fade,” she said. “But sticky wage growth may mean the Bank remains uneasy about inflationary pressures in the near term.”

Thomas Pugh, economist at the audit firm RSM UK, said the figures painted “a clear picture of a cooling labour market” but that pay growth was still running at almost double the rate the Monetary Policy Committee would be comfortable with.

The central bank cut interest rates by 0.25 percentage points to 4.25 per cent this month but the MPC was split three ways, with two members favouring a 0.5 percentage point cut and two others voting to leave interest rates unchanged.

Two MPC members warned on Monday against rushing to cut interest rates again, stressing the need to see more evidence that inflationary pressures were easing.

Clare Lombardelli, a BoE deputy governor, said wage growth was “still too high” to be consistent with the BoE’s inflation target, even though it looked likely to fall by year end.

Other MPC members are worried that the cost pressures on business and uncertainty over trade will drive unemployment higher.

Policymakers have been struggling to assess the state of the jobs market because of the poor quality of data based on the ONS’s labour force survey, which suffered a sharp drop in response rates after the pandemic.

The ONS said on Tuesday that its headline estimates of employment, unemployment and inactivity, which are based on the survey, should now be more reliable, following concerted efforts to boost responses.

But even though it has hired more interviewers to boost the survey’s sample size by 55 per cent, the number of responses it receives is still slightly short of pre-pandemic levels, and the response rate remains 17.2 percentage points lower, at 21.3 per cent.

The ONS said this meant more detailed breakdowns of the data, for example, estimates of young people not in education or employment, remained volatile from one quarter to the next.