The tightest UK labour market in living memory is failing to tempt people back into work, creating severe shortages for employers.
Unemployment is at levels that were last lower in the 1970s, and job vacancies are at record highs. Yet there are 570,000 fewer available workers than before the pandemic struck.
The number of people declared inactive — neither in work nor looking for a job — rose further in the three months through February to 8.86m, the UK's Office for National Statistics said. That’s the equivalent of 21.4% of the population aged 16 to 64, the highest rate since 2017.
The figures suggest there is no end in sight to the skill shortages that blight sectors from computing to haulage and hospitality. The squeeze is pushing up wages, with some firms forced to offer double-digit pay increases.
For the Bank of England, concerns centre on the possibility of an inflationary spiral as higher pay leads firms to keep raising prices to protect their profit margins.
UK policy makers are expected to raise borrowing costs this year to the highest since the financial crisis more than a decade ago. They’re aiming to tame inflation, which is running at its highest rate in three decades.
The rise in inactivity during the pandemic has been driven by those declaring themselves long-term sick. Many of those are older workers suffering from long-Covid conditions.
“We expect higher inactivity to become a permanent feature of the UK labour market, as around six in 10 of these older workers say they will not consider returning to work in the future,” said Jake Finney, an economist at PwC.
UK earnings shrank by the most since 2013 when adjusted for surging inflation, despite unemployment falling to its joint lowest in almost 50 years.
The jobless rate dipped to 3.8% in the three months to February from 3.9% before, the figures showed, matching a rate last seen in late 2019 and one that has not been lower since 1974.
Annual growth in average earnings excluding bonuses picked up to 4% from 3.8% but fell short of rising inflation — which hit 6.2% in February — and led to a 1.3% drop in its real value, the ONS said.
"Soaring inflation is casting a big shadow over an otherwise buoyant labour market," Nye Cominetti, an economist at the Resolution Foundation think tank, said.
The tight labour market is making many Bank of England policymakers fear that Britain's currently high inflation — pushed up by energy prices and post-pandemic supply-chain difficulties — could become entrenched.
The Bank of England has raised interest rates three times since December, more than any other big central bank.
UK government budget forecasters predict inflation will peak at nearly 9% at the end of the year, and that living standards are set to see their biggest fall since records began in the late 1950s.
• Bloomberg and Reuters