So many extraordinary things happened last year that one remarkable record may have escaped your notice: for the first time there were more job vacancies than unemployed people in the UK.
At first sight, this is something to celebrate. But it is also a cause for concern. In central banker speak, it is a measure of the “tightness of the labour market”, which some economists fear may lead to a wage-price spiral that will prove very painful to break.
When explaining why higher interest rates are needed to suppress inflation, the Bank of England puts much emphasis on the labour market. “Although demand [from employers] has begun to ease, the labour market remains tight,” it said last month after increasing interest rates to 3.5 per cent.
But how tight is it? The truth is, we don’t know. Like many key economic statistics, the job vacancy numbers are not hard facts but rather wobbly estimates. And there are doubts about the accuracy of these estimates among senior figures in the government.
“There are real questions about the vacancy numbers,” says one Downing Street official.
Advertisement
These concerns are shared by Paul Donovan, chief economist at UBS Wealth Management, who says that the upheaval caused by the pandemic means that the job vacancy rate may not be measuring the same thing as in the past: “It is not clear that the labour market is as universally tight as the vacancy numbers suggest.”
If he is right, the implication is worrying: the Bank may conclude that to choke off inflation it should raise interest rates by more than turns out to be necessary. That would mean more pressure on household budgets, more lost jobs and more failed businesses.
One problem with the vacancy figures is that they cover only posts that are advertised externally. One former government minister who also has doubts about the statistics points out that “I don’t advertise jobs in my office, so they don’t exist as far as the figures are concerned”.
Before the pandemic, about half of job vacancies were filled internally, so were not reported. When Covid-19 hit, hundreds of thousands of people in the UK lost their jobs, and when restrictions were lifted many went to work for different employers. That meant businesses were having to fill more jobs by advertising externally, pushing up the vacancy figures.
At the same time, there has been a big shift in the proportion of jobs that are advertised online. This is much cheaper than advertising in newspapers and there is a suspicion that some employers engage in “fishing” exercises: posting ads just to see what candidates might be out there without having real vacancies.
Advertisement
There is also a broader concern about the quality of a range of economic data due to a post-pandemic reduction in the number of companies that report figures to their national statistics agencies. In the US, the proportion of companies reporting has more than halved.
This may seem of interest only to statistics nerds. After all, you don’t need figures to tell you the labour market is tight. Just look around. In many sectors, notably hospitality, there is clearly a severe shortage of workers, with employers desperate to fill vacancies. Some say it is so difficult that they have given up trying to recruit, which would imply that reported vacancies might actually be understating rather than overstating the demand for labour.
Yet there is other evidence to suggest that the labour market may not be as tight as the figures indicate. True, pay growth in the private sector has risen to a heady 7 per cent and, as Andrew Sentance pointed out on Monday, early indications from payroll data for November are that it is moving up to 8 per cent. Yet that is still well below the rate of inflation.
“Real wages [adjusted for inflation] have been very negative for a very long time — this is not what happens when labour markets are tight,” Donovan says.
The fact that real wages are falling means that pay increases are not threatening to boost inflation by injecting more demand into the economy. Household budgets are continuing to be squeezed. And in some of those sectors where there has been real wage growth, such as hospitality, many businesses are having to make do with fewer employees. That means their wage bills are rising by less than the headline rate of pay increases, limiting the “cost push” boost to inflation.
Advertisement
The reality is that the economy has changed so much over the past three years, let alone since the last serious bout of inflation, that it is very difficult to predict how the labour market will behave in 2023. But there seems a very good chance that it will be less inflationary than past experience and the vacancy figures would suggest.
If that happens, inflation could fall very quickly this year, as some economists are predicting. The average of recent forecasts collected by the Treasury is for inflation of 5.1 per cent at the end of the year. But the EY Item Club reckons it will be just 2.2 per cent (within spitting distance of the Bank’s target of 2 per cent), with earnings growth of 3.2 per cent.
In common with other central banks, the Bank of England was slow to react to the inflationary pressures from the opening up of economies after Covid lockdowns and from the Ukraine war. So now there will be a natural tendency to err on the side of toughness to restore its inflation-fighting credibility.
Given the likelihood that the labour market is not as tight as it appears, the risk is that the Bank increases interest rates by more than needed to bring down inflation. That would make what will be a tough year even more painful — for the government as well as the rest of us. No wonder they are fretting about the vacancy figures in Downing Street.
David Wighton, a former business editor of The Times, is a columnist for Financial News
