What’s happening in the UK labour market?

Despite the generally weak outlook for the UK economy, labour market data continue to paint a surprisingly robust picture. But looking beyond the headline numbers, a series of challenges are evident – notably in the diversity of economic experience across and within regions.

New data released this week by the Office for National Statistics (ONS) provide an update on what happened in the UK labour market in the final three months of 2022. This short note summarises what they tell us about the UK and regional labour markets.

What do they tell us about the UK labour market?

The key headlines for the UK as a whole are:

The UK employment rate rose by 0.2 percentage points to 75.6% in the final three months of 2022, with the unemployment rate increasing by 0.1 percentage points to 3.7% over the same period.
Meanwhile, there was a slight fall (0.3 percentage points) in the rate of economic inactivity.
Reflecting the wider economic outlook, the number of vacancies in the UK fell again. This is the seventh consecutive reported drop in the number of vacancies.
Workers’ take-home pay continues to be squeezed, with wages in cash terms growing more slowly than inflation (resulting in falling ‘real’ wages). Pay excluding bonuses (‘regular pay’) fell by 2.5% compared to the year before, with pay including bonuses (‘total pay’) falling by 3.1%.

The rate of economic activity is something closely watched in recent years as we try to understand the longer-term effect of the pandemic on the labour market. ONS analysis suggests that one driver of the most recent dip is younger people (those aged between 16 and 24) seeking work, but that there might also be a partial reversal of the ‘great retirement’ with those aged 50-64 returning to the labour market.

Falling real wages is one factor explaining the rising number of industrial disputes, with the ONS calculating that 843,000 working days were lost in December as a result of industrial disputes (this is the highest number since November 2011).

What do the regional data show?

Unfortunately, not all of the UK-wide data referred to above are available broken down for different parts of the UK. What do those that are available tell us about regional labour markets?

Employment rates for those aged 16-64 across the different regions of the UK are all at or around their highest for the final three months of the year (see Figure 1).

Figure 1: Employment rates for the UK and ITL1 regions, Q3

Source: ONS

Similarly, unemployment rates across the UK for those aged 16 and over are all at or around their lowest for the final three months of the year (see Figure 2).

Figure 2: Unemployment rates for the UK and ITL1 regions, Q3

Source: ONS

A similar picture can be seen in the Department for Work and Pensions data on those accessing unemployment-related benefits (see Figure 3), known as the ‘claimant count’ rate.

The claimant count rate in all regions is significantly lower than its pandemic peak, and most are back close to where they were in January 2020. But there are few regions (such as London and the West Midlands) where the rate continues to be more substantially higher than it was three years ago.

Figure 3: Claimant count rate (%), UK and ITL1 regions

Source: ONS

Beyond these headline measures of labour market activity, the ONS also publishes information provided to them by HM Revenue and Customs (HMRC) which comes from its ‘Pay As You Earn (PAYE) Real Time Information’ system. This is generally referred to as ‘payroll’ employment data and measures the number of people registered to pay PAYE.

While the HMRC data come from a large administrative database, it remains an experimental statistic and so should be used more cautiously than other more established measures of labour market activity. It also only covers employment that is subject to PAYE – so not everyone who is working.

Nevertheless, it tells us something about what is happening in the labour market. And due to its much larger size, this ONS is able to provide these data broken out by much smaller areas. This helps us understand better what is happening to the economy in different parts of the UK.

Looking at the period between January 2020 and January 2023, payroll employment in the UK grew by 3.5%, with most regions of the UK seeing broadly similar growth rates of 3-4% (see Figure 4). The exception here is Scotland where payroll employment grew closer to 2%.

Figure 4: Payroll employment growth Jan 2020 – Jan 2023, UK and ITL1 regions

Source: ONS

Breaking these data down into smaller areas (in this case, we use ITL3 regions of the UK), we can see much greater differences in payroll employment over this period (see Figure 5).

Figure 5: Payroll employment growth Jan 2020 – Jan 2023, ITL1 and ITL3 regions

Source: ONS

Specifically, within London, some of these areas have seen almost no growth in payroll employment relative to three years ago, while others have seen payroll employment growth by over 10%. A similar story is evident in the North West of England.

Comparing the growth in payroll employment in the ITL1 region (red dots) and the median growth rate for the ITL3 regions that comprise each ITL1 region (blue dots) we can see these are similar.

This suggests that the ITL1 data are broadly representative of the ITL3 regions within it, but looking at the range of growth rates makes it clear these do not tell the whole story. For example, in the South West, one ITL3 region (Swindon) has fewer people on payroll than they did three years ago, even though the South West as a whole has grown its payroll employment by 3%.

This underlines the importance of having more granular economic statistics that are better able to represent the diversity of economic experience within regions and across the UK.

Final thoughts

The UK economy is facing a challenging outlook with even the most optimistic forecasters expecting weak growth through 2023. It is more likely that the UK will experience a recession of some kind – with the size of the economy shrinking – in the next year.

Given the different compositions of regional economies in the UK – reflecting their different economic strengths and specialisms, as well as their different economic challenges – we can expect that there will be regional differences in the size of any economic downturn as well as its duration.

We’ll be keeping you updated through 2023 on what the latest economic data tell us about how regional economies are performing.