To me, Jacob Rees-Mogg does not represent the zenith of British political capability. However, his recent tactic of leaving messages for absent civil servants at empty offices may just represent the high water mark of the British labour market in recent times.
That labour market has been remarkable, with The Great Retirement emerging from the pandemic alongside record higher education applications, a reduction in EU employees and strong recruitment by the arguably somewhat bloated public sector.
Hence, despite the understandable worries of some economists about what the pandemic may mean for labour demand and so unemployment, the outcome has been record vacancies – around 1.3 million at the last count – and virtually full employment.
However, sadly, that may be about to change for the worse and the present UK labour market may look a bit different over the next 18 to 24 months. Inflation, for a variety of well-versed reasons and augmented by Russia’s horrendous invasion of Ukraine, has materially built up; the governor of the Bank of England was daft to say it was transitory in 2021. Inflation takes a long time to get into the system and also, similarly, to exit. Hence, as things stand, the UK is looking to at least 12 to 24 months of elevated inflation.
The governor of the Bank of England was daft to say inflation was transitory in 2021
How to deal with inflation in the present cycle is a big policy question, but fuelling demand is not the number-one idea. In light of the war in Ukraine in particular, how far the Bank of England raises interest rates is an interesting discussion point.
Further increases to some degree are anticipated, which will increase housing finance costs for many when home heating, motor fuel and food prices are on the upward march. The questionable increase in national insurance contributions to fund a highly inefficient NHS also eats into household spending power.
Russia’s actions change things from a commodity perspective, with regard to energy and food, and maybe on a structural basis too. Russia is also part of the de-globalisation trend – this may be its prime aim, it should be said – which will also probably mean higher prices for longer.
So, what does all this mean for the domestic labour market? Well, the prospect of the aforementioned increases in base rates will further curtail demand, just as households are also having to allocate a material amount of their income to essential items.
The outcome of this will be lower aggregate demand, which is central to easing upward price pressure. As demand eases, firms will need to even more clinically assess their own cost bases to protect margins that in many cases are already being squeezed by a lack of total cost recovery.
Government’s capability to further stimulate demand, to support labour utilisation, is perhaps questionable at this time, with national debt at an all-time high and sterling being potentially vulnerable to international investors’ concerns about how the UK is managing its domestic finances; and a weakening pound would import inflation.
Accordingly, it is reasonable to assert that companies will start to reduce the need for labour to reflect easing demand and cut costs. The first outcome of such change is expected to be an easing of vacancy rates followed, unfortunately, by an increase in unemployment.
Those civil servants that are enjoying the lie-in, the lack of commute and the back garden may need to take heed of Rees-Mogg’s banter, as more straitened times may mean that their bargaining power is about to change.
Dr Clive Black is head of research at Shore Capital Markets