What is the UK labour market?

The labour market, also known as the jobs market, refers to the supply of and demand for labour, and is reflected in several key indicators:

1. Employment – number of people in paid work.
2. Unemployment – number of people without a job who have been actively seeking work.
3. Economic inactivity – number of people who are neither working nor looking for a job.
4. Vacancies – number of positions for which employers are actively seeking recruits from outside their organisation.
5. Pay growth – estimates of earnings and pay generally cover three areas: basic pay, overtime and bonuses.

How does the labour market affect people and businesses?

A business needs people to help the day-to-day running of the operation. A shortage of labour can cause difficulties through preventing the business from growing as fast as it would like and facing higher labour costs as they compete for a limited number of available workers.

On the other hand, businesses may look to invest further in staff training and new technology where feasible, instead of recruiting.

The hit to people’s incomes and wider consumer confidence during periods of high unemployment, also hinders the wider economy by weakening consumer spending, a key driver of UK GDP. The Bank of England when setting interest rates watches developments in the UK labour market closely because it’s a source of inflationary pressures, particularly pay growth.

What is the state of play in June 2024?

The UK labour market continues to show signs of cooling. While still below the historic average, the unemployment rate is rising and the number job vacancies – a good indicator of demand for labour – continues to fall (see Chart 1).

The size of UK’s workforce has shrunk significantly with over 900,000 fewer workers since the COVID-19 pandemic, driven by more people off work due to long-term ill health, more older people out of work and fewer young people in work (see Chart 2).

Despite recent falls, earnings growth remains high and with inflation falling, real pay growth is rising.

The size of UK’s workforce has shrunk significantly with over 900,000 fewer workers since the pandemic, driven by more people off work due to long-term ill health, more older people out of work and fewer young people in work (see Chart 2). Despite recent falls, earnings growth remains high and with inflation falling, real pay growth is rising.

What is the outlook for the UK labour market?

The OBR (Office for Budget Responsibility) expects some further loosening in labour market conditions in the near term, including moderate rises in the unemployment rate. The OBR also expect average pay growth to slow over the coming months. The labour participation rate is forecast to continue falling from its pre-pandemic quarterly peak of 64.3% to 62.8% by 2028.

Some of the main challenges facing the UK labour market

• Low labour supply, which adds to inflationary pressures and stunts GDP growth.
• High economic inactivity, which is holding back GDP growth, productivity and limiting improvements in living standards.
• Lack of a clear strategy to tackle skills shortages means it remains a big challenge for businesses and the public sector, limiting their ability to adapt to a changing economy. 
• Gaps in the UK labour market data driven by data collection problems, have made it more difficult to gauge the underlying state of the labour market.