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?

The UK labour market continues to show signs of cooling. The unemployment rate has risen, wage growth is slowing 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 800,000 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).

What is the outlook for the UK labour market?

The OBR (Office for Budget Responsibility) expects labour market conditions to remain subdued in the near term. The OBR expect the unemployment rate to peak at 4.3%, equivalent to 1.5 million people, in the third quarter of 2024, before falling to a trough of 4% in mid-2025.

The participation rate is forecast to gently decline to 63% by 2029, driven by rising health-related inactivity, the overall ageing of the population, and the rise in employer NICs announced in this Budget. This is down from a peak of 64% before the Covid pandemic in the first quarter of 2020.

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.
• Policy interventions, such as the employer National Insurance (NI) tax rise from the Budget which could mean lower wage growth, or higher unemployment by increasing employment costs.
• 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.