Unemployment rate falls to lowest since 1974, but wages still fall

The UK's unemployment rate has fallen to its lowest in nearly fifty years, but workers are still suffering sharp falls in real income as wage growth lags behind inflation.

The country's jobless rate fell to 3.7 per cent from 3.8 per cent in the three months to March, the lowest since 1974 and better than economist expectations of no change in the first quarter, according to figures from the Office for National Statistics ONS.

The ONS said that the economy now has more open job vacancies than unemployed people for the first time since records began, which is a sign that businesses are struggling to recruit. In April, the number of vacancies rose to a new record of 1.29 million.

Despite the tight labour market, most workers are still not able to secure wage increases in line with inflation, which hit 7 per cent in April and is due to climb to double-digits later this year. The ONS said that earnings growth, which strips out bonuses, increased by 4.2 per cent in the first quarter. Adjusting for inflation resulted in a steep 1.2 per cent drop in earnings, the worst fall since 2013.

There is evidence that companies across different sectors are offering bonuses as a way to attract new talent. The ONS's weekly earnings growth including bonuses hit 7 per cent, accounting for lucrative annual payments made in the financial sector.

The strength of bonuses in some sectors like construction and especially finance means total pay is growing faster than average earnings, but underlying regular earnings are falling sharply in real terms, said Darren Morgan, director of statistics at the ONS.

Economists said the drop in unemployment could be due to further falls in the total size of the workforce after the epidemic. The ONS estimates that the UK's workforce is about 1 million less than if it had continued on pre-pandemic trends.

Pay growth has become a closely watched metric due to fears that rising inflation will feed into workers wage demands and embed higher prices into the economy. Martin Beck, chief economic adviser to the EY Item Club, said there are few signs that higher wages are contributing to runaway inflation.

Beck said there is still little evidence to suggest that a wage-price spiral is developing. With a weakening economy cooling demand for labour, there is the risk that rising price pressures will result in second round effects on inflation. The ONS said that total employment was below its pre-Covid peak as more workers dropped out of the labour force after the pandemic. The employment rate went up by 0.1 percentage points to 75.7 per cent.

The Bank of England believes that the unemployment rate will fall further from its present lows before rising above 5 per cent in the coming years as a result of higher interest rates that will help to dampen demand in the economy.

The UK's economic growth slowed at the beginning of the year, and there was a 0.1 per cent contraction in March, despite the fall in unemployment in the first quarter.

Paul Dales, chief UK economist at Capital Economics, said that the jobs market would continue to boom and wage pressures would increase despite the uncertain economic outlook. He said that the Bank of England will have to raise interest rates from 1 per cent to 3 per cent to contain this source of domestic inflationary pressure.