Tuesday’s official data on the state of the UK labour market have been interpreted in several conflicting ways, so here is an attempt to cut through the fog. I took two main points from the figures themselves.
First, activity in the labour market continues to cool.
I would not pay much attention to the headline numbers on unemployment, which extrapolate from an unreliable Labour Force Survey (the LFS) which even the ONS now says “should be treated with additional caution”.
Instead, I would focus on the PAYE data compiled by HMRC, which show growth in payroll employment has been trending down for some time and is now flatlining, with 17,400 fewer jobs in January 2025 than in July 2024.
Second, and despite this, pay growth is still firm.
Annual growth in regular pay in the three months to December was 5.9% in cash terms and 3.4% in real terms (adjusting for CPI inflation). Regular pay growth in the private sector was even stronger, at 6.2%.
What to make of all this? It does seem odd that pay growth is so robust despite the weakness in activity. However, some of this may simply be down to the usual time lags – the forward-looking business surveys are more negative on both jobs and wages.
On Monday, for example, the CIPD released a poll which suggested that one in four employers (25%) are planning redundancies in the next three months, the highest level in a decade outside the pandemic.
On the same day, the Federation of Small Businesses (FSB) revealed that 24% of small firms are braced for a contraction in the size of their business in the first three months of 2025.
The measures announced in the Budget have also distorted the labour market. In short, firms are already feeling obliged to pay staff more ahead of the large increases in the national minimum wage in April, but at the cost of hiring freezes and job losses.
In turn, this suggests there is little reason to expect another big bump in pay growth in April itself. Moreover, weak demand will make it harder for firms to pass on higher labour costs anyway, meaning activity rather than inflation is likely to take the strain
I would therefore be wary of reading anything into this for interest rates. The latest pay data were still broadly in line with the Bank of England’s assumptions for Q4 2024. As such, they are not necessarily a new worry for the MPC, even though the Bank’s February MPR forecast of a slowdown in pay growth to ‘around 3¾%’ by the end of 2025 does look challenging.
Overall, then, there are some mixed signals.
The good news is that real wages are still rising at a decent pace, so consumer spending could provide a significant boost to economic growth this year (especially with interest rates set to come down further too).
The bad news is that job insecurity is also rising, which may keep consumers cautious despite any improvements in their individual finances.
This confusing picture is not unusual at turning points in the economy, but hopefully the good news will win through.
Plain-speaking Economics 
Very reasonable analysis relating it to a macro turning point ie. when whether up or down – the latter in this case, leading/coincident/lagging signals conflict for a period: labour market is typically a late-stage lagging indicator. Rising precautionary savings likely to dampen consumption and growth as time passes.
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