Labour Crunch to Keep Upside Pressure on UK Wages

ONS Business Insights and Conditions Survey (BICS):
» 13% of businesses reported that their employees' hourly wages had increased in January 2023 compared with December 2022
» 24% for businesses with 10 or more employees.
» 27% of businesses with 10 or more employees were experiencing worker shortages in late February

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This latest snapshot from the ONS will do little to assuage concerns about the tight labour market and could increase the likelihood that the Bank of England may be forced to raise interest rates further to stop inflation from becoming embedded in the economy.

Even though the number of vacancies had shown signs of falling at the end of last year, it hasn’t done much to ease the labour crunch.

27% of businesses were grappling with worker shortages in late February and it means many will have little option but to increase wages to attract and retain staff.

This piles on yet more pressure at a time when higher energy costs and rising prices of goods are still causing headaches.

Around a quarter of companies, with more than ten staff, had to push up wages in January compared to December and it’s likely that this trend has continued over the past month.

Scorching childcare costs, averaging at just under £15,000 for a full-time nursery place are exacerbating the problem, with mothers in particular reducing hours or quitting positions as a result.

The governor of the Bank of England, Andrew Bailey, warned earlier this month that the tight labour market was still a cause of concern and posed an inflationary risk but stressed the jury was still out on whether fresh hikes, pushing the bank rate above 4%, were needed.

Given comments from other policymakers in recent days, there is likely to be dissent around the table at the Bank of England's monetary policy committee meeting later this month.

There is the worry that due to the lag effect of rate rises, the economy could already be heading for a steep downturn, and fresh hikes could cause unnecessary economic pain.

This latest ONS data indicating that a wage spiral is still a risk is another small piece of the puzzle but the picture will be made clearer in the broader unemployment and wage data due out on Tuesday.

Market Report by Susannah Streeter, Head of Money and Markets at Hargreaves Lansdown.