Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.
The unemployment rate fell to 4.9% in the three months to February, an unexpected piece of good news for the Government. This is a reversal of the upwards trend in recent months but fails to paint the full picture for two reasons:
· Economic inactivity rose again to 21%. The unemployment rate only captures those actively seeking work. Persistently high inactivity shows that a significant proportion of the population has left the labour force, in some cases permanently. Elevated youth unemployment suggests many have yet to enter it at all.
· Ongoing instability in the Middle East is likely to weigh on confidence and costs, meaning this fall in unemployment is unlikely to mark a sustained turning point. The labour market is therefore set to come under renewed strain in the months ahead.
Where are we now?
Several factors have contributed to a tightening labour market in recent years. Decisions made in the Chancellor’s Budgets have increased the tax burden on businesses. Average earnings, excluding bonuses, fell to 3.6% in February. That is no longer running hot, but it is still high enough to keep the cost of employment elevated. At the same time, advances in AI are adding pressure at the entry level, as firms increasingly turn to automation to perform routine tasks (or at least plan to).
This is already feeding through into persistently high youth unemployment. The longer young people remain out of work, the harder it becomes for them to re‑enter the labour market, with scarring effects that can last for years. The consequences are wide‑ranging. There is a clear human cost, as young people face the financial and social pressures that come with prolonged unemployment. There is also a fiscal impact, as higher welfare spending places additional strain on the public finances. And crucially, there is a long‑term business risk: if young people aren’t brought into the workforce now, then we face a severe skills shortage. Without the next generation of workers developing the necessary skills, where are the leaders of tomorrow coming from?
Where are we going?
The growing impact of the crisis in the Middle East on businesses and the wider economy cannot be ignored. Higher energy costs are feeding through quickly, squeezing business margins and unsettling confidence. This is where the real risk sits.
For the Government, this is an awkward and worrying mix. Growth is too weak to generate meaningful increases in tax revenues, while the pressure to shield households and businesses from higher energy costs continues to mount. That combination points to a renewed squeeze on the public finances just as room for manoeuvre is already severely limited.
For the Bank of England, the dilemma remains. While the labour market would benefit from looser monetary conditions, external developments are keeping inflationary risks alive. The likely outcome is interest rates remaining higher for longer, with little immediate relief.
