UK wage growth for new hires slows to 4-year low

The UK’s new hire wage growth has slowed to its weakest pace in over four years, marking the sharpest drop in pay since the pandemic began. The figures offer the clearest sign yet that Britain’s labor market is losing steam.

The slowdown reflects growing caution among businesses, which are increasingly reluctant to raise wages to attract staff. After years of worker shortages, the balance is shifting: employers are pulling back, while the number of job seekers rises rapidly.

For the Bank of England, the easing wage growth provides some relief. The central bank has been wary of rising pay fueling persistent inflation. Softer wage pressures reduce the need to maintain high interest rates and could even open the door to rate cuts in the coming months.

But from a broader perspective, that‘s a good-news portrait that‘s less rosy. The prime minister, Keir Starmer, has vowed to increase living standards and deliver growth for working families. Sluggish pay increases undercut that vow, especially since households are still burdened with stubbornly expensive food prices, pricey mortgages, and increasing tax bills.

The figures are from the most recent study of the jobs market by the Recruitment & Employment Confederation (REC) and KPMG, which is closely watched by policy ­makers. It indicated that starting salaries in August had increased slowly since March 2021. At the time, the economy was weighed down by tight COVID-19 restrictions.

Employers cut hiring as candidate supply rises

According to the survey, employers are being cautious with their hiring. Escalating costs and a brittle economy are to blame. Many companies have put off expansion plans, such as hiring, until they see more signs that the economy is in clearer territory.

At the same time, the ranks of job seekers have swelled. There was a pickup in the availability of candidates at the quickest pace since 2020. Job losses, hiring freezes, and concern over job insecurity have prompted more people to enter the labour market.

Vacancies fell sharply for a sixth consecutive month. Job postings in the retail and hospitality sector saw the sharpest decreases. Construction was the only industry to report a greater demand for permanent staff, providing a rare bright spot.

Permanent job placements dropped again, with cost pressures and company caution holding back hiring. But the decline was the slowest in three months, suggesting the worst of the downturn may end.

Modest pay growth reduces inflation risk but increases political pressure

The news is some relief for the Bank of England. Policymakers have worried that workers will seek higher wages as inflation has surged lately. To date, those fears have not come to pass. Slower pay growth reduces the risk of “second-round” effects, which might otherwise entrench inflation.

But for the government, it’s more complicated. Weak wage growth and increasing unemployment further complicate Starmer’s promise to improve living standards. Families are already squeezed by soaring food prices and energy bills. And the threat of more tax hikes in the autumn budget may only increase the pressure.

Jon Holt, group chief executive and UK senior partner at KPMG, said the trading environment continues to be “complex”, with many chief executives holding off on further investment and hiring.

Neil Carberry, chief executive of the REC, said there was still life in the jobs market but noted that with fewer jobs available and more people seeking work, the overall picture remained subdued. He cautioned that businesses would closely watch the Autumn Budget in the hope that the Chancellor would avoid measures increasing the cost of hiring staff.

The slowing of payroll gains bolsters the case for the Bank of England to weigh interest-rate cuts in the months ahead. When unemployment rises and inflation pressures abate, pleas for monetary support will become increasingly louder.

However, sluggish wage growth is a reality for families: Incomes are falling behind growing living costs. Once more, the gap between pay and prices is at the center of Britain’s economic debate.

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