Weekend reading: Tensions in the labor market threaten to derail Britain’s economic recovery

The UK labor market is coming to life.

After months of closure due to Covid, businesses are finally welcoming customers through their doors again – and ramping up hires to meet growing demand.

Companies hired 356,000 workers in the past month. Total weekly hours worked hit their highest level since the start of Covid, and average weekly wages jumped 7.3% in June.

However, all is not rosy. The number of salaried employees remains 206,000 below pre-pandemic levels. Vaccines are more than 70,000 higher than before Covid, suggesting companies may struggle to hire workers.

The tension in the labor market is increasing.

“After such a long lockdown freeze, the labor market cannot simply be reactivated like a switch – which is why bottlenecks are appearing in parts of the economy,” said Nye Cominetti, senior economist at the Resolution Foundation.

Read more: Unemployment rate in UK drops as easing lockdown drives hires up

Data from KPMG and REC highlight the scale of shortages in the market, with the supply of permanent and temporary staff falling at the fastest rate on record in June, as companies quickly find available candidates.

Uncertainty is a great deterrent

Fragility can keep applicants away from jobs. The economic damage the Covid pandemic has caused to many sectors of the economy has heightened uncertainty about the future of businesses.

Corporate debt levels have skyrocketed as businesses rushed to fill cash flow shortfalls triggered by a forced reduction in demand resulting from restrictions aimed at curbing the spread of the virus.

As a result, reluctance to return to work may be high among workers on leave due to concerns that their roles may disappear. These fears are most acute among workers in leisure and hospitality, an industry that has absorbed the hardest income shocks during the pandemic. The concerns are compounded by their potential exposure to a more deadly strain of the virus.

“Labor shortages are most acute in sectors that reopened after an almost complete closure during the lockdown, which are heavily dependent on migrant labor, and which are recruiting heavily from a workforce. younger still largely unvaccinated, ”said Cominetti.

Read more: UK labor supply drops to fastest pace on record in June

Workers in this sector are “understandably reluctant to work in places with high levels of social interaction as the number of Covid cases continues to rise.”

Salaries are rising in the hospitality industry as companies increase starting salaries to attract candidates, according to Yael Selfin, chief economist at KPMG UK. Financial strains are acute among these companies and many of them “may not be able to afford higher wages,” which could prompt them to raise prices, she warned.

Meanwhile, the pandemic has prompted large swathes of the workforce to place a higher value on work / life balance. People were able to spend more time with loved ones and pursue their personal interests, triggering a realignment of career goals.

Aviva research shows that the pandemic has made 47% of people care less about their career progression.

Read more: Rethinking the pandemic: almost half of all UK workers are less career-oriented

Early retirement rates among older workers have jumped, possibly due to the surge in asset values ​​- especially house and stock prices – since the onset of Covid. Young workers are re-entering education to improve their skills and become more attractive to employers, Selfin said.

All of these factors create a vacuum in the labor market.

It’s a labor market

Bargaining power reverts to workers as companies increase their capacity to cope with a rush in consumer spending.

For the first time in a long time, the labor market is strongly in favor of workers, meaning some may wait for better offers from other companies, delaying their return to the labor market.

Anecdotal evidence is emerging that shows that companies are increasing incentives in order to attract talent. Some financial services companies would increase starting salaries by 20% and offer one-time bonuses of nearly $ 40,000 to attract junior staff.

And the data confirms it. Excluding holiday fluctuations, the ONS estimates that underlying wage growth is between 3.2 and 4.4 percent, which means wages are increasing in real terms.

Experts have pointed out that supply and demand imbalances in the labor market will ease once the leave scheme is completely abolished.

Read more: Staff crisis: exodus of junior bankers as burnouts force 70% to resign

Incentives to return to work will tighten, which should bring people back into the labor market. Companies have likely found ways to address capacity constraints, which means that the demand for staff will not be as high, which will put downward pressure on wages. In theory, inflationary pressures will not emerge as businesses will eat away at this unused capacity.

But, Selfin insisted that some sectors will experience permanent labor constraints, such as IT and social services, due to a skills shortage.

Getting people back to work before income support is complete will help prevent an unnecessary spike in unemployment, Cominetti believes.

“The number of people on leave is set to drop sharply as the program is phased out, as those who were still on leave at the end of September are at great risk of unemployment.”

Elimination of supply constraints is not guaranteed

The elimination of labor supply constraints is not guaranteed. Evidence in the manufacturing sector shows that commodity shortages persist longer than previously thought, while U.S. service companies have struggled to hire workers for several months now.

Selfin warned that “the summer could still be tight as more businesses reopen fully and EU nationals stay away due to quarantine rules.”

If workers do not return as planned and supply chains are not restored to their pre-pandemic state, prices could continue to rise, eating into consumers’ real income and potentially triggering lower spending.

Economic recovery will suffer if labor shortages prove to be long-lasting rather than transient.

Read more: PMI: US service sector extends resurgence until June

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