Jobs standstill due to weaker demand for staff and limited supply of available workers

The jobs market is at a standstill, according to Dr John Philpott, Chief Economist at the Chartered Institute of Personnel and Development, commenting on the latest UK labour market statistics published today by The Office for National Statistics.

Dr Philpott said:
Today’s official figures confirm that the UK job market is now at a virtual standstill. The flood of new jobs enjoyed in recent years has slowed to a trickle. And with the number of economically inactive people of working age at a record level, the government is still a long way short of meeting its goal of ’full employment in an opportunity society’.

Despite continued good news on measured unemployment hardly any net new jobs have been created this year and the employment rate for people of working age has fallen to 74.7%. The slowdown is even more marked in terms of hours worked - a further fall of 4.2 million hours per week in the latest quarter.

Improving productivity:
Slower growth in employment, a dip in the employment rate and a drop in hours worked suggests weaker demand for staff. This is at first sight surprising in an economy that is still growing well above its long-run sustainable rate but is understandable when improvements in productivity are taken into account. Year-on-year growth in output per worker spurted to 2.9% in the second quarter - faster than at any time since 2000 and higher than what is generally thought to be the UK’s underlying rate of labour productivity (i.e. around 2% per annum).

The impact of higher productivity on jobs would have been more marked had hours worked not fallen - which in turn has kept redundancies at historically low levels. But forward looking recruitment intentions - as identified by the latest CIPD HR indicators survey published yesterday - are weaker than at any time since last winter.

Record numbers economically inactive:
Alongside weaker demand, however, there has been a contraction in the available supply of labour; partly the result of falling unemployment but mainly due to a fall in the number of people active in the labour market (the number of people of working age not in a job or looking for work has risen to yet another new record level of 7.93 million, 21.6 per cent of the working age population).

The recent rise in inactivity might be explained by weaker demand for labour, which would suggest that the labour market is cooling. But CIPD survey evidence on recruitment difficulties also suggests that many jobless people are either unable or unwilling to fill available vacancies. 1 in 3 employers who were looking to recruit staff in the summer months failed to do so because of a total lack of applicants.

A smaller active labour pool could itself help explain why employment has been growing more slowly if employers are struggling to find staff. Where this occurs, part of the demand for labour manifests itself in a higher stock of vacancies rather than higher employment, which is precisely what has been happening of late. The average number of unfilled job vacancies in the three months ending September 2004 was 662,800 - 55,700 more than the same period a year earlier.

Pressure on wages?:
The fact that the labour market is currently subject to the forces of both weaker demand and limited supply makes it tricky to predict the future course of pay pressure. Both the latest earnings figures for August and CIPD survey evidence on autumn pay expectations offer some comfort that pay inflation will remain below the rate that would seriously concern the Monetary Policy Committee, in part because of the pressure valve offered by increased immigration. However, a limited labour pool means that the labour market will for some time remain relatively tight for any given pressure of demand. It is therefore far too soon to stop worrying about potential pay pressures. Consequently the jobs standstill does not necessarily mean that the current interest rate cycle has reached a peak.