After three decades of poring over employment data, one recruitment veteran has concluded what the bond markets have been whispering all along: the UK labour market is structurally sound. But that does not mean the Bank of England can rest easy.
The report, published this morning by a senior partner at a London-based executive search firm, argues that the headline unemployment rate, currently hovering around 4.2 per cent, masks a deeper resilience. The author, who has advised firms from Canary Wharf to Aberdeen, notes that the labour force participation rate has stabilised after the post-pandemic blip, and that wage growth is moderating in line with productivity. In other words, the red lights flashing in the inflation dashboard are starting to dim.
But let us not pop the champagne corks just yet. The expert’s 30-year ‘guide’ is essentially a long-term average of job-to-job flows, vacancy durations, and real wage trends. His conclusion is that the UK is not facing a structural mismatch of the sort that plagued the 1970s or the eurozone periphery. Instead, the current tightness is cyclical, driven by the lagged effects of monetary policy tightening. This is a view that will comfort the Old Lady of Threadneedle Street, but only up to a point.
Consider the gilt market. The 10-year yield has been oscillating around 4.15 per cent, reflecting a market still scarred by the Truss-Kwarteng debacle. A stable labour market reduces the risk of a wage-price spiral. But it also means the Bank can afford to be patient, keeping rates higher for longer to squeeze out the last vestiges of stickiness. The recruitment expert’s data suggests that the recent uptick in redundancy announcements is a blip, not a trend. Yet the City remains sceptical, and rightly so.
Capital flight is the real worry. Foreign investors have been net sellers of UK gilts for six consecutive months, according to the latest ONS figures. They are looking at the same labour data and seeing a government that cannot balance its books. The fiscal headroom is gone. The Chancellor has no room for pre-election sweeteners. The labour market stability espoused by this recruiter is the calm before the storm of austerity that is likely to follow the autumn Budget.
Moreover, the regional picture is far from uniform. London’s financial sector is hoovering up talent while manufacturing in the Midlands and the North is shedding jobs. The expert’s guide smooths over these disparities, presenting an average that is not representative of the lived experience in Stoke-on-Trent or Sunderland. The Bank of England knows this. Its own agents’ reports highlight that skill shortages in engineering and healthcare are driving up costs, while oversupply in retail and hospitality is depressing wages.
Let us be clear: a 30-year guide is a useful backdrop, but it is not a forward-looking indicator. The recruiter’s data stops at the end of 2023. Since then, the Budget has announced tighter labour laws on zero-hours contracts and a significant increase in the National Living Wage. These are supply-side shocks that will feed through into hiring decisions. The market’s response will be more important than any historical average.
The bottom line is this: the UK labour market is stable, but stability is not the same as strength. The recruitment expert’s conclusion is a reminder that the economy has not fallen off a cliff. But the cliff edge is still ahead. For investors, the message is to stay short-dated gilts and avoid sectors exposed to labour cost inflation. For the Bank, it is to hold the line. For the Chancellor, it is to pray that the recruiter is right, because if he is wrong, the gilt market will exact a very painful toll.
