What ails the UK job market?

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A personal view from Debapratim De, Deloitte’s Chief Economist in the UK.

What ails the UK job market?

The labour market continues to cool.

The last few years have seen a sharp squeeze in demand for labour. This is evident in the vacancy data, with job vacancies now down to almost half their 2022 peak and at the lowest level since 2014, if we ignore the pandemic period.

Businesses have scaled back hiring for a number of reasons.

Recent increases in employer National Insurance and the National Living Wage have significantly raised labour costs, especially for employers in retail and hospitality. These sectors, which have also suffered from weak consumer spending, have shed a total of 226,000 jobs since March 2023.

Erratic growth and elevated levels of geopolitical risk have dampened wider business sentiment. The conflict in the Middle East has raised energy prices, further compressing margins and sharpening the focus on cost control among large UK corporates, as highlighted in our latest CFO Survey.

The possibility of further tax changes in the upcoming Budget and recent changes to employment law are also contributing to corporates’ cautious approach towards hiring and discretionary spend.

Elevated labour costs are encouraging firms to seek efficiencies, especially through the use of new technology. There is evidence from the Bank of England's Agents' discussions with businesses that AI adoption is helping some firms reduce costs and labour requirements. Tasks such as document preparation, invoice processing, and basic analysis, usually assigned to early-career roles, are likely being automated.

This reduction in hiring is impacting young workers the most. Graduate job postings are down 7% from last year and at their lowest level since the height of the pandemic in 2020, according to recruitment firm Indeed. Some measures show youth unemployment close to its highest level since 2014.

Alongside this weakening of demand, the supply of labour has become less constrained. The post-Brexit rise in immigration has led to an increase in the foreign-born workforce. Rises in inactivity seen during and after the pandemic have also partly unwound over the last few years.

Reduced demand and an increase in the supply of labour mean private sector wage growth has decelerated to its weakest pace since 2020.

We anticipate weak growth and persistent uncertainty to remain the primary drag on labour demand over the coming months. Although a recent decline in immigration will slow the supply of foreign-born workers, the labour market should continue to soften on balance.

We expect wage growth to moderate further, falling below inflation in autumn and lagging price rises through the first quarter of next year, while unemployment ticks up to peak at 5.3%. Given this outlook for wages, which implies underlying price pressures remain in check, the Bank of England is likely to keep rates on hold this year, unless we see a sharp spike in energy prices.