The ONS delayed the publication of its labour market report because some of the data has become unreliable. In a special guest article for Wave, Dr Julius Probst, European Labour Economist at Stepstone (Totaljobs) and speaker at our Talent Matters Live event in September, has investigated how this affects any analysis of the labour market and gives the lowdown on what we do know about the state of the market.
The ONS paused the publication of its labour market report
This November will now be the second month in a row that the Office of National Statistics (ONS) had to pause the publication of some labour market statistics that are part of the official UK labour market report, including figures for the employment and unemployment rate.
The data relies on the UK Labour Force Survey. Over the last couple of years, the response rate for the survey has dropped to such an extent that the ONS does not seem to trust its own labour market estimates anymore.
Consequently, the most recent labour market report published by the ONS uses “experimental statistics” for the unemployment and employment rate based on HMRC’s pay-as-you-earn real-time information. Moreover, the ONS said it will reintroduce the ‘Transformed Labour Force Survey’ by next spring.
However, there is some doubt that the information the ONS released in the months prior to pausing the report is even accurate. Moreover, economists question the accuracy of the new “experimental statistics”.
The truth of the matter is that we are currently stabbing in the dark during a time when the labour market is potentially weakening quite quickly. More importantly, policymaking institutions like the government and even the Bank of England (BoE) are informed by ONS data, making this quality drag even more dangerous.
In its effort to slow down inflation, the BoE has hiked interest rates to above five percent. The rate hike cycle also has the unfortunate side-effect of bringing down business investment, slowing consumption, and cooling the labour market.
On the other hand, businesses are seeing the positive impact of a cooling labour market, as reflected in Totaljobs’ latest Hiring Trends Index. This is shown in the slight uptick of business hiring confidence and the decreasing average time to hire.
For policy makers at the BoE, it is imperative to know exactly how quickly the labor marker is cooling and whether wage growth is normalising. Unfortunately, they cannot rely on the most recent data published by the ONS because the data points might be flawed.
So where does the labour market stand right now?
Vacancies in the UK were at a record high of 1.3 million in 2022. The labour market was extremely tight, and companies were experiencing severe difficulties hiring staff. Over the last year, the number of vacancies has fallen to below one million. While this is still above pre-pandemic levels, it points to a gradual labour market slowdown.
The Totaljobs Hiring Trends Index shows that the average time to hire has fallen across industries from a peak of 6.4 weeks to 5.8 weeks in Q2 2023. Furthermore, businesses feel more confident about finding the talent they need when compared to 2022.
The unemployment rate in the UK increased from a low of about 3.6% last year to about 4.3%. Historically speaking, this is still a very low unemployment rate. While the new experimental data shows a value of only 4.2%, it is far from certain that this estimate is accurate. The gradual increase certainly indicates an easing of labour market conditions.
Payroll employment still grew at a decent pace in the first half of this year but has now started to decline. Because the data can be subject to large revisions, it is not prudent to draw too many conclusions from just the latest data point. Looking at the three-month and six-month moving average, payroll job growth is now substantially lower than at the beginning of the year.
What is the economic outlook?
Unfortunately, a lot of data currently indicates that the UK economy might have just slipped into recession. This is not surprising, given that the BoE had to hike rates substantially due to the biggest inflationary shock in decades. The UK economy is also suffering from three major points of weaknesses that other countries do not face.
First, the after-effects of Brexit are still weighing heavily on the economy and the labour market. Brexit led to a substantial negative labour supply shock, especially for the service sector. There is a substantial shortage of workers in hospitality. Truck and delivery drivers, healthcare workers and many other manual occupations are suffering from missing workers due to Brexit. The shortage has also contributed to rising wages and rising prices in those industries, which is making it harder for the BoE to get inflation back to two percent.
Second, the UK has seen a substantial rise in economic inactivity, more so than other advanced economies. Some 600,000 people are now reporting that they are not employed and also not looking for a job because of long-term sickness. The overburdened NHS has close to eight million people on waiting lists. The problem will therefore not be resolved any time soon.
Third, the rapid rate hikes are weighing heavily on the housing market. Adjusted for inflation, house prices have fallen more than 10%. Housing transactions have plummeted because many people simply cannot afford to buy real estate at current interest rates, given that nominal house prices have not declined significantly.
Another negative shock awaiting the UK economy coming from the housing market is that most mortgages are only fixed for a couple of years before interest rates adjust. This means that at the end of this year and throughout 2024, millions of households in the UK will see their mortgage costs surge. According to Bloomberg, many borrowers might see their mortgage costs increase by up to several thousand pounds. Given that median household disposable income in the UK is only at about 32,000 pounds, this will lead to a significant income shock and depress consumption.
What does that mean for the labour market?
The negative effects coming from Brexit, the rise in economic inactivity, and the negative shock coming from the housing market make a UK recession within the coming year extremely likely.
The good news is that many forecasters currently believe that the economic contraction might be relatively mild compared to historical recessions. Furthermore, economists at the Bank of England project that the unemployment rate might only rise modestly to about 5%.
Some sectors are still experiencing severe labour shortages due to Brexit. Moreover, many companies are still scared by the enormous hiring difficulties they experienced last year and will choose to keep staff on payroll instead of opting for layoffs right away, maybe reducing working hours instead.
While these projections should make us somewhat optimistic that a UK recession might be mild, the estimates are also subject to large uncertainty. Problems with the ONS data make us question whether the latest unemployment figures are accurate. Projecting the figures six or twelve months into the future is even more guesswork.
UK policy makers now face the unfortunate challenge of navigating a labor market that seems to turn while having to trust in unreliable data.