'Real wages on the cusp of shrinking for fourth time since financial crisis' – thinktank
Real wages are on the cusp of shrinking for the fourth time in less than two decades, the Resolution Foundation has warned.
The latest ONS data shows February’s fall in unemployment was a blip. A sharp rise in March – to 5.5% in the single-month data, the highest since 2015 – returned unemployment to 5% over the first three months of the year. Early indications suggest further bad news in April, with payrolled employment falling by 100,000 on the month (although initial April estimates are always subject to large revisions).
The picture on pay packets is even bleaker. Wage growth has continued to weaken in cash terms and was only able to match – rather than outpace – inflation in March. With the war set to push up inflation over the coming months, pay packets are set to start shrinking in real terms.
The foundation notes that this stuttering pay performance since 2008 has left average weekly earnings £278 below their pre-financial crisis levels.
The one silver lining is that the weak state of the labour market means that second-round effects from rising inflation are likely to be smaller than they were following Russia’s invasion of Ukraine, giving the Bank of England pause for thought before raising interest rates.
Julia Diniz, economist at the Resolution Foundation, said:
The UK labour market entered the current period of economic turbulence in a weak place, with unemployment at five per cent and real wage growth falling to zero.
With inflation set to increase over the coming months, the UK is on the cusp of its fourth period of falling real-wage growth in less than two decades. This stuttering performance goes a long way in explaining the political and economic discontent that surrounds modern Britain.
“The one silver lining to the UK’s weak labour market is that we are much less likely to see the kind of wage-price spirals that followed Russia’s invasion of Ukraine. This should give the Bank of England pause before raising interest rates.
James Smith, developed markets economist at ING, said the UK labour market figures question the need for Bank of England rate hikes.
The latest UK jobs report, which features rising unemployment, sharply lower payrolls and tumbling wage growth, is a reminder that the economy is much less susceptible to ‘second round’ effects from the incoming energy shock on things like wage growth than it did four years ago in the last oil/gas shock. We’re still forecasting a rate hike in June, but that is far from guaranteed.
Following the April Bank of England meeting, we’ve tentatively been forecasting a one-and-done rate hike in June. That remains our base case, mainly because our house view on energy prices, particularly for natural gas, and given that the strait of Hormuz is showing little sign of reopening. But it’s a close call, and we remain open-minded about next month’s meeting. A lot will also depend on tomorrow’s inflation data.
UK government borrowing costs ease, oil prices fall
UK government borrowing costs have eased for a second day, while crude oil prices have also fallen, after Donald Trump said he had paused a planned attack on Iran to allow talks aimed at ending the US-Israeli war against the country.
The yield, or interest rate, on the 10-year gilt (as UK government bonds are known), dropped 5 basis points to 5.07%. This means that the 10-year yield is back at levels seen before a jump on Friday. The 30-year yield fell 4 basis points to 5.7%.
Markets are reacting to news that Andy Burnham, the main contender to challenge prime minister Keir Starmer, has signalled that he will not relax Starmer’s and the chancellor Rachel Reeves’ fiscal rules. Burnham is the leftwing mayor of Greater Manchester and is gearing up to fight a byelection in Markerfield.
Brent crude, the global oil benchmark, is down 1.3% at $110.68 a barrel.
On the stock markets, the FTSE 100 index climbed 52 points, or 0.5%, to 10,376.
“With unemployment at 5%, the expectation is that it will rise this year as business uncertainty grows amid the UK’s political unrest and the Iran War,” said Patrick Milnes, head of policy for people and work at the British Chambers of Commerce. The BCC expects it to increase to 5.5%.
A further drop in vacancies, now at their lowest outside the pandemic for more than a decade, suggests businesses are pausing recruitment. This is unsurprising as labour costs remain a key concern.
But with the conflict in Iran likely to drive higher inflation later in the year, as unemployment also rises and growth remains weak, the possibility of stagflation is very real.
To counter this the government must set out a pro-growth agenda which capitalises on the UK’s economic strengths. While AI could boost productivity, its impact on young people entering the job market is a worry, given the further rise in the number of economically inactive people aged 18-24.
Firms are also alarmed over plans to remove the lower National Minimum Wage level for 18-21 year olds. This could deter them from employing young adults and place upward pressure on all wage scales.
He said further action is needed to ease the cost burdens firms face, such as changes to electricity bill levies and reform of business rates. These would go a long way to boosting confidence.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, said:
These figures signal a growing distress within the UK’s labour market as soaring labour costs and the fallout from the Iran war drive more businesses to reduce recruitment and limit pay awards.
The continued fall in job vacancies is a worrying sign of the strength of the labour market as it suggests that demand for staff is deteriorating quickly amid global headwinds and the growing financial squeeze on firms.
Slowing salary growth offers hope that any second-round inflation effects from the Iran war will be limited, particularly with rising unemployment and a weaker economy likely to help keep pay settlements on a downward trajectory.
The UK is on the cusp of a perilous jobs crunch, with the twin financial hit on businesses from skyrocketing energy costs and declining customer demand amid the Iran conflict likely to lift unemployment close to 6% this year.
Muted wage growth and falling payroll employment make a June rate hike less likely, by fuelling optimism that a softening labour market can help ensure this inflation shock proves more transitory than persistent by dampening demand across the economy.
Paul Dales, chief UK economist at Capital Economics said:
The sharp weakening in the labour market in April may help to restrain the recent upward march in gilt yields by highlighting that, so far at least, the Iran war is prompting businesses to reduce headcounts rather than raise wage growth to compensate workers for higher inflation.
He noted that private sector wage growth excluding bonuses eased from 3.2% to 3%. That’s the slowest rate since October 2020 and is a touch below the 3.25% that the Bank of England considers broadly consistent with its 2% inflation target.
Overall, we all know that CPI inflation will rise over the next 6-12 months, possibly from 3.3% in March to between 4%-4.5%. But the weakening in the labour market suggests that the burst of inflation is more likely to be short-lived than longer-lasting and means the Bank of England may not need to raise interest rates much, if at all.
Introduction: UK wage growth slows and unemployment rises as firms react to Iran war
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
Unemployment in the UK has unexpectedly increased to a rate of 5%, while wage growth slowed, with businesses squeezed by the war in the Middle East.
The number of people claiming unemployment benefits rose by 27,000 in April, the largest rise since July 2024.
Regular wages, excluding bonuses, rose 3.4% year on year in the three months to March, down from growth of 3.6% in February, and matching City forecasts. Including bonuses, pay growth picked up to 4.1% from 3.9%. But after taking inflation into account, wages grew by just 0.3%.
The Bank of England is closely monitoring pay growth to assess to what extent higher consumer prices are feeding through. The Iran war has caused a surge in energy prices. But several central bank policymakers believe the slowdown in wage growth since early 2025 is likely to continue because of the war’s impact on hiring and the wider economy.
The number of payrolled employees dropped more sharply in April, by 100,000, after a 28,000 decline in March, which was revised from a smaller fall. April’s decline was the largest since the early days of the pandemic in May 2020.
Excluding the Covid period, this was the biggest monthly fall since records began in 2014, said Martin Beck, chief economist at the economics consultancy WPI Strategy. That left total headcounts 210,000 lower than a year earlier. He added:
The latest labour market data suggest the UK jobs market is starting to feel the repercussions of higher energy prices, geopolitical uncertainty and weaker business confidence.
The generational divide also remains striking. Since payroll employment peaked in October 2024, the number of employees aged 34 and under has fallen by 296,000, while employment among those aged 35 and over has risen by over 18,000. In other words, the slowdown is not being felt evenly: younger workers continue to bear the brunt of a cooling labour market.
Vacancies fell again in April to their lowest level in almost 12 years, excluding the Covid period. They are now around 15% below their pre-pandemic level, while the number of unemployed people per vacancy is among the highest since 2020. The message from employers is clear: firms are becoming more cautious, hiring plans are being scaled back, and the balance of power in the labour market is shifting away from workers.
Vacancies dropped 28,000 in the three months to April to 705,000, a five-year low.
The Agenda
10am BST: Eurozone trade for March
10.10am BST: Bank of England deputy governor Sarah Breeden speech
