A quick look at the latest labor market numbers suggests the economy was in good shape heading into the end of 2021.
In the three months to November, employment increased by 60,000 and the unemployment rate fell 0.4 percentage points in the quarter to 4.1%.
The layoff rate has fallen to a record low, revealing a smooth transition out of the furlough scheme and plenty of luck for a chancellor constantly betting that the effects of the pandemic would be short-lived.
Put unemployment and the layoff rate together and it’s only a hair’s breadth from the pre-pandemic level in February 2020.
Wages tell a different story. While total pay including bonuses edged up 0.4 percentage points to 4.2% from the previous month, pay without bonuses remained static. Once inflation is taken into account, wages reversed in real terms, falling by 0.9%, even including bonuses.
The Resolution Foundation think tank said the pay cut was the third in a decade, after real wages fell after the financial crisis between 2011 and 2014 and in the year after the Brexit vote in 2016.
As in previous episodes, the current hit to the standard of living of the average worker is unlikely to be short-lived as rising energy, food and fuel prices eat away at household finances.
It began last summer, the think tank’s economists said, and “is expected to deepen in the coming months with inflation expected to peak at 6% in April, before beginning to ease in the second half of 2022. “.
Rishi Sunak will take comfort in HMRC’s PAYE income data for December which showed little sign the Omicron variant was having a big impact, despite fears its emergence could cause a new wave of life-threatening illnesses.
To some extent, the gains in the PAYE data simply reflect a shift of workers from self-employment to permanent jobs. Nevertheless, a rise of 184,000 in December was impressive and brings the number of people added to the payroll since February 2020 to 409,000.
It appears that employers listened carefully to the message from South Africa that Omicron was not as vocal as Delta and continued to meet the growing demand for their goods and services as if the newcomer did not exist.
However, the increase in the number of employees conceals the large number of people, mostly over the age of 50, who have left the labor market altogether, taking with them their skills and experience. Many will have Covid for a long time, while others will be tired of working and will now depend on their wealth and pensions to provide income.
According to Tony Wilson, director of the Institute for Employment Studies, there are 260,000 more people unemployed due to poor health and early retirement than before the crisis and older women are the largest group outgoing.
He said policymakers should not forget that the labor market was growing strongly before the crisis, “so these declines in participation are even worse than they appear”. If pre-crisis trends had continued, there would be 1.1 million more people in the labor force.
Kitty Ussher, chief economist at the Institute of Directors, said: “The legacy of the pandemic appears to be this increase in economic inactivity.”
How does all of this change the way the Bank of England thinks when it sets interest rates next month? Ahead of Christmas, the central bank’s Monetary Policy Committee (MPC) said the prospect of blistering wage growth and a booming job market played a big role in the decision to raise rates at 0.25%.
When so much of everyone’s salary will be diverted to paying higher heating bills in the coming year, the MPC might think it can sit on its hands. If inflation is to be crushed by a hit to incomes, static wages and rising inflation could be said to do their own dirty work without the central bank needing to further burden households by raising costs of borrowing.
This is not how the MPC will interpret events, which is why most analysts are still predicting a key rate hike to 0.5% in February and a rise above 1% by the end of February. the year.