At the beginning of the year, unemployment fell to pre-pandemic levels, with record job vacancies leading to warnings of potential staff shortages.
The unemployment rate fell from 4.1 per cent to 3.9 per cent in the three months to January, beating estimates of 4 per cent, according to the Office for National Statistics.
Grant Fitzner, chief economist of the statistics office, said that demand for workers remains strong with vacancies hitting a record of 1.31 million last month. Total employment, based on payroll numbers, rose by 275,000 to 29.7 million in February.
The tightening labour market has led to increased expectations that workers will demand pay if companies are struggling to hire employees and keep hold of staff. The resignation rate of employees leaving their jobs is the highest on record, according to Deutsche Bank.
Pay packets are not yet in line with consumer prices inflation, which reached a 30 year high of 5.5 per cent in January. The figures office said that earnings grew only 0.1 per cent at the start of the year when adjusted for inflation. The National Institute for Economic Research think tank estimates that people pay less after inflation is 1 per cent lower than the same time last year.
Kemar Whyte, senior economist at the institute, said that the developments in Ukraine are expected to boost households energy bills and that workers should expect a tighter squeeze on their real income.
The unemployment rate is close to the low of 3.8 per cent before the pandemic in late 2019, the best jobless figure since 1974, when the economy was last hit by an oil shock and inflationary spiral.
The stagflation of the 1970s resulted in rising wages as unionised workers demanded higher pay to keep pace with double-digit inflation.
The average earnings, including bonuses, rose by 4.8 per cent - better than expected compared with an estimate of 4.6 per cent in the three months to January, as many people receive one-off bonuses at the beginning of the year. Earnings with bonuses stripped out increased by 3.8 per cent.
Since bonuses have continued at high levels for some workers, total earnings growth just kept ahead of rising prices over the past year, even though regular pay has dropped again in real terms, Fitzner said.
The total employment rate is below its pre-pandemic level, rising slightly by 0.1 per cent to 75.6 per cent in the three months to January. The number of people actively looking for work or falling out of the job market has gone up, according to the ONS.
The professional services group, the chief economist at KPMG, said that staff shortages could be a sign of a long-term problem. We are beginning to see the limits in which vacancies can be filled by those entering the labour market. The Bank of EnglandBank of England is expected to respond to rising inflation by raising interest rates for the third time in four months on Tuesday, taking the Bank rate to a pre-pandemic level of 0.75 per cent. By tighter monetary policy, it is designed to stave off inflation by raising the cost of borrowing and reducing demand.
Economists at Deutsche Bank believe that the central bank will increase rates in May, June and August in the face of prolonged inflation driven by the war in Ukraine, lifting the Bank rate to 1.5 per cent.