Solid UK jobs backdrop bolsters Bank of England's rate hike case

Economic and Financial Analysis

18 January 2022
Article
                  Solid UK jobs backdrop bolsters Bank of England’s
                  rate hike case
                  At face value, the UK jobs market looks much like it did pre-pandemic. Taken
                  with rising headline inflation, that makes a February rate hike look more
                  likely. But a severe wage-price spiral looks unlikely, even if pay growth is close
                  to pre-virus rates. That suggests the Bank of England will hike less quickly
                  than markets are now assuming

                     Content

                  On all the main metrics, the UK jobs market looks remarkably similar to its pre-pandemic state.
                  The latest fall in the unemployment rate to 4.1% takes it to within a whisker of its pre-Covid
                  level. The ending of the furlough scheme last September has been a smooth success, with no
                  discernible increase in redundancies – a stark contrast to what happened ahead of the
                  scheme’s original end-date in October 2020.
                  Alongside rising headline inflation rates and growing evidence that Omicron’s impact has been
                  modest, a February rate rise from the Bank of England looks increasingly likely.

Redundancies have remained stable despite wage support ending last
September

Source: ONS, ING calculations

But markets are probably overestimating what comes thereafter. For Bank rate to head north of
1% later this year, as investors are currently pricing, we need signs that wage pressures are
building further, akin to the trend seen in the US right now.
The data has been pretty hard to interpret recently, owing to various Covid-related distortions.
But cutting through the noise, it looks like wage growth has slowed but remains roughly around
pre-pandemic rates – which in themselves were at historically-elevated levels.
Some of this is undoubtedly due to skill shortages in parts of the jobs market, often a
combination of lower inward migration and other structural factors. The chart below shows a
reasonable link between sectors that have seen pay grow in excess of pre-virus trends, and
those with vacancy rates above their historical averages. Unsurprisingly that’s in areas like
transport/logistics – a function of lorry driver shortages and the rapid shift to online consumer
spending during Covid.

Wage growth has exceeded pre-crisis trends in sectors with above-average
vacancy rates

Source: Macrobond, ONS, ING calculations

For median pay, we have compared the current wage level in each sector to where it would
have been had pre-virus trend growth continued. Similarly, we have compared vacancy rates to
their average level in 2018/2019 in each sector.

But part of the wage growth story through 2021 was probably also a by-product of the jobs
market playing catch-up after the pandemic. There appears to have been strong demand for
jobs both from employers and employees.
Vacancy rates are strong, though the number of people starting, or due to start, a new job was
well-above historical averages through the autumn. This looks a lot like catch-up after a
prolonged period of below-average job switching during the pandemic.
Indeed, if we added up job-to-job flows since early 2020 (albeit a fairly crude measure), they are
still some way below what we’d have expected had pre-virus trends continued instead.

Job-to-job flows have increased since last summer's reopenings

Source: ONS, Marcobond, ING

Grey line combines weekly data on numbers 'started a new job recently' and 'waiting to start',
and is a three-month moving average. Purple line (cumulative job-to-job flows) is as of the third
quarter, which is the latest data point)

Remember too that employment was always likely to rebound much more rapidly than after
past recessions, owing to the heavy concentration of pandemic job losses (around half) in

consumer services. These sectors have a history of both leading the wider jobs market out of
downturns, and having above-average levels of employee turnover in a typical year.
We’d expect to see employment growth slow over coming months as this effect dissipates,
potentially taking some of the pressure off wage growth if the initial mismatches we saw in the
jobs market last summer have begun to fade.
In short, we think the jobs market is strong enough to support two rate hikes this year, in
addition to the ‘quantitative tightening’ that the Bank is likely to undertake in tandem. But the
lack of a severe wage-price spiral limits the case for raising rates faster and further than in any
of the post-financial crisis years.

James Smith
Developed Markets Economist
+44 20 7767 1038
james.smith@ing.com

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