The UK’s unemployment rate has fallen to just 3.5%, according to new data – but that’s not necessarily good.
That means in just a month, the rate decreased by 0.1% at a time when economists had not expected any change.
The Office for National Statistics (ONS) said this drop happened in the three months leading up to August, and is a rate not seen since 1974.
On the surface, that sounds like more people are in work, which sounds like a boost for the economy. But it’s much more complicated than that.
Here’s what you need to know.
Why is it so low?
The number of people who have left the workforce altogether due to long-term illness has increased, to a total of almost 2.5 million. This is a record-high.
ONS also shows more than 600,000 people stopped working since the start of 2020 – 377,700 of them due to long-term sickness.
These people are still not working now, but because they’re not actively looking for a job, they’re not counted in the unemployment rate.
Long-term illness is not the only reason people might leave the workforce either – taking on extended education and retiring were the second and third most common reasons for dropping out of employment.
Altogether, the proportion of people aged between 16 and 64 not looking for work (the economic inactivity rate) leapt up to 21.7% between June and August according to the ONS.
What does this mean for employers?
With fewer people looking for work, companies are struggling to recruit workers.
Vacancies are estimated to be at around 1,246,000, having been at 1,200,000 in the three months before September.
This is the largest hike in unfilled roles since the Covid pandemic began in 2020.
ONS’ head of labour market and household statistics David Freeman explained: “While the number of job vacancies remains high after its long period of rapid growth, it has now dropped back a little, with a number of employers telling us they’ve reduced recruitment due to a variety of economic pressures.”
Capital Economics told the BBC this means the Bank of England will be under “intense pressure” to raise rates “aggressively” in coming months. This is what the Bank has to do to control inflation, and means borrowing money becomes more expensive.
The Bank of England has increased interest rates seven times just since September in an effort to control inflation.
The head of research at the British Cambers of Commerce told Bloomberg UK: “The UK is facing the tightest labour market in years. Shortages are holding back the ability of many businesses to service existing customers and grow.”
Businesses are already struggling due to the declining value of the pound, and anticipation of a recession certainly doesn’t help.
How does this affect pay?
In a bid to draw in more employees and try to expand their companies, employers are raising wages. But, rises in salary are still not keeping up with the rising cost of living.
So, regular pay (outside of bonuses) grew at an annual rate of 5.4% in the June to August period. This is the strongest growth seen outside of the pandemic.
However, it’s still a long way off inflation, which is at 9.9%.
When this is taken into account, the value of regular pay actually declined in the three months leading up to August.
There is also a 4.1 percentage point difference between private and public-sector pay, which could incentivise more workers to strike.
How has the government responded?
This shortage in workers also means the government is not close to reaching its goal of increasing the growth rate to 2.5%, because it prevents companies from expanding.
Commenting on these new ONS figures, chancellor Kwasi Kwarteng said: “The fundamentals of the UK economy remain resilient.
“Our ambitious Growth Plan will drive sustainable long-term growth, meaning higher wages and better living standards for everyone, and we are cutting taxes so people can keep more of what they earn.”
Kwarteng’s medium-term fiscal plan is also set to be released on October 31, which could cause further disruption – especially as he will announce huge spending cuts. This could lead the Bank to hike interest rates even higher.
