The UK’s labour market is suffering from the impact of higher payroll taxes and a hit to confidence, according to new data which point to a slowdown in earnings and companies cutting back on hiring.
A closely watched monthly survey from KPMG and the Recruitment and Employment Confederation, which is monitored by the Bank of England, said starting salaries for new workers were growing at the slowest pace since March 2021, and companies reported falling demand for workers in July.
Vacancies also contracted at the fastest pace since April last month and the availability of workers rose at the fastest monthly pace since 1997. Firms and recruiters said the cutbacks on hiring were down to worries about the economic outlook and higher payroll costs putting pressure on margins.
The Bank of England last week cut interest rates for the fifth time in a year to 4 per cent but warned there were more inflationary pressures in the economy than expected, suggesting further monetary easing may be delayed until next year.
Policymakers are weighing the risks of another episode of high prices against evidence of a clear slowdown in the jobs market, as unemployment has hit a four-year high and wage growth is slowing faster than the Bank’s forecasts.
Jon Holt, group chief executive and a senior partner at KPMG, said a further reduction in rates this year could “help boost business confidence. But many firms will continue to pause major investment decisions until there is greater clarity in the autumn.”
Lower interest rates push down borrowing costs, making it more attractive for businesses to hire and invest — boosting economic growth.
Official labour market statistics will be published on Tuesday and are expected to show another step down in wage growth, vacancies, and employment in the three months to June. Data from the Office for National Statistics has been plagued by accuracy concerns, leading the Bank and economists to lean more on private surveys like that from KPMG and REC.
According to a separate jobs market index from CIPD, a human resources platform, hiring intentions in the private sector have slumped to their lowest in any period outside the pandemic, as companies try to adjust to the rise in national insurance contributions and the increase in the national living wage introduced in April.
Of the 2,000 surveyed firms, 57 per cent said they would recruit in the next three months, compared with 65 per cent before the autumn budget last year. More companies said they were preparing to cut, rather than expand, their headcount in the coming months.
The UK’s retail, hospitality and care sectors — which hire younger, lower skilled workers — have been hardest hit by the payroll taxes: half of companies reported “large” cost increases since April. Just over four fifths (84 per cent) of private sector companies said their employment costs had grown since the budget.
The Bank last week said the rise in food price inflation in June could also be partly attributed to supermarkets passing on higher costs to consumers.
James Cockett, senior labour market economist at the CIPD, warned the government’s Employment Rights Bill could add more pressure on businesses who will shy away from hiring younger staff. “If new employment laws increase the risk and complexity of recruiting and managing new staff, employers are less likely to take a chance on young workers with limited experience and more development needs,” he said.