Wages grew again in the three months between October and December, figures published yesterday (14 February) by the Office for National Statistics (ONS) show. Pay growth rose to 6.7 per cent, its highest level (outside the period of the pandemic) since at least 2007. This was driven by tightness in the labour market: there still aren’t enough people to fill the vacancies being advertised, and employers are competing for the best people by raising salaries.
This is, clearly, great for workers, but precisely what economists – including the Bank of England governor Andrew Bailey, who famously urged people to exercise “restraint” when asking for pay rises – had feared. If wages climb too much, they worry, it could lead to a “wage-price spiral” in which higher wages mean demand rises, pushing up prices and causing entrenched inflation.
How has this happened? The answer lies partly in reduced labour force participation: yesterday’s figures showed that since the pandemic, more than 516,000 people have become economically inactive, not working or seeking employment. By far the largest cohort of these is older workers – those between the ages of 50 and 64 – who make up nearly 318,000 of this economically inactive group. This phenomenon has been ongoing since the pandemic and there are many reasons for it: from sickness, to taking a bigger role in the provision of childcare, to just not really fancying work any more. “Everyone’s looking for a one-off answer to try and explain this,” I was told by Emily Andrews, the deputy director for work at the Centre for Ageing Better. “But every single retirement decision is multifaceted.”
Nonetheless, the sudden exodus of older workers has left us, economically speaking, in the lurch. The over-60s, in particular, are in a uniquely comfortable position to pull a stunt like this: one in four pensioners has assets worth more than £1m, thanks to the continued proliferation of defined-benefit pensions among their age group, the plentiful cheap credit they have enjoyed in recent years, and the relatively cheap property that boosted them up the housing ladder. Work has become more tiring, with longer hours; there’s also an element of discrimination against older workers in the jobs market – so it is natural that the enforced slowdown brought on by the pandemic helped many realise it was time to kick back and reap the rewards of their hard work a little earlier than planned.
For the economy, though, these individual decisions may prove disastrous. Firstly, there is the inflation issue. “How labour market tightness evolves will be a key factor determining wage growth and domestic inflationary pressure over the medium term,” warned a Bank of England report in August. That tightness has remained, as demonstrated by that 6.7 per cent wage growth figure. Although energy prices have been the determining factor for the recent rise in inflation, higher wage growth bodes badly because “pressure stemming from the labour market has tended to be more persistent in the past than that caused by factors such as the cost of energy”, the report said. In other words, once wage growth climbs, inflation risks becoming embedded.
Karl Thompson, an economist at the Centre for Economic and Business Research (CEBR), told me wage growth is “quite astoundingly high at the moment” – which is pushing inflation expectations “higher than they were before”. Having 318,000 people going on cruises rather than filling job vacancies is, he added, “not helping”.
A fall in the number of people in work has another knock-on effect: a potential fall in the tax take. People drawing on their pensions tend to pay less income tax (if any) than if they were earning, and with 318,000 fewer people paying into the pot, the UK is “going to struggle… in terms of generating the tax revenue that funds state pensions and healthcare costs”, said Jonathan Cribb, head of the retirement, savings and ageing sector at the Institute for Fiscal Studies. That means, added CEBR’s Thompson, that “between us, we will need to make up the money for their state pensions” – an additional pressure on the rest of the working population during a cost-of-living crisis.
All of this leads to questions about economic growth. The UK is currently expected to fall into recession at some point this year, although forecasts of its severity become shorter and shallower by the month. But still, said Thompson, “we’ve got the worst growth prospects in the G7” and, following the pandemic, the “highest increase in inactivity… we’re world-leading in that sense”.
The good news from yesterday’s labour market figures was that the inactivity rate among 50-64-year-olds appears to have edged down very slightly in the fourth quarter of last year, from a peak of 27.3 per cent in the second and third quarters, to 27.1 per cent in the fourth quarter, which equates to about 25,000 people going back to work. It’s not clear whether the people in question were returning to similarly paid jobs or opting for lower-paid or part-time roles – or, indeed, whether this is the start of a trend spurred by the cost-of-living crisis, or just a blip in the data. Either way, older workers’ sabbaticals may have been nice, but it’s very likely that they have led to long-term pain for the rest of us.