For three decades, recruitment expert Alan Bannister has watched the ebb and flow of the UK jobs market. His latest assessment reads like a bond trader’s nightmare: the labour market is tightening faster than a squeeze on a gilt yield, and the skills shortage is driving up the cost of talent like a central bank printing money. The Bank of England’s rate setters are watching, but they should be alarmed.
According to Bannister, the post-pandemic recovery has created a mismatch between demand and supply that would make any supply-side economist weep. Vacancies remain stubbornly high, while the pool of available workers has shrunk. Early retirement, long-term sickness, and a decline in EU migration have left a gaping hole in the workforce. The result? Wage inflation that is feeding into the broader price spiral.
Let us be clear: this is not a blip. The Office for National Statistics reports that job vacancies have fallen from their peak, but they are still above pre-pandemic levels. Meanwhile, the unemployment rate is at historic lows. The natural rate of unemployment—the so-called NAIRU—appears to have shifted. Structural factors, not cyclical ones, are at play.
Bannister’s guide notes that sectors such as hospitality, construction, and IT are feeling the pinch most acutely. The demand for digital skills has exploded, but the supply of qualified workers has not kept pace. Recruitment agencies are now paying signing bonuses and offering flexible working arrangements as standard. The cost of hiring has increased by as much as 20% in some sectors.
This is a classic case of demand-pull inflation in the labour market. Employers are bidding up wages to attract scarce talent, and those costs are passed on to consumers. The Bank of England’s Monetary Policy Committee has raised rates 14 times, but it may need to do more. The danger is that wage-price spirals become entrenched, as they did in the 1970s.
The fiscal implications are equally troubling. Higher wages mean higher tax revenues, but they also mean higher public sector pay bills. The Chancellor will be watching the Autumn Statement nervously. If wage growth remains elevated, the government’s borrowing costs will rise, and the fiscal headroom will evaporate.
Bannister’s advice to businesses: invest in training and automation. The days of cheap labour are over. For workers, the next few years could be a golden age of wage growth, but only if they have the right skills. For investors, labour market data is now a leading indicator. Keep an eye on the ONS figures; they will move markets.
In the City, we have a saying: when the labour market tightens, the bottom line suffers. The UK is now facing a structural shortage of labour that will take years to resolve. The only question is whether inflation will be tamed before the economy is broken.
