Saturday 17 July 2021 9:00 am | Updated: Monday 19 July 2021 8:00 am

Weekend Read: Job market tension threatens to derail Britain’s economic recovery

Candidate volumes for unfilled jobs fell at the second fastest on record rate in July (Photo by Dan Kitwood/Getty Images)

The UK labour market is roaring back to life.

After months of being shuttered due to Covid, businesses are finally welcoming customers back through their doors – and ramping up hiring to cope with soaring demand.

Companies added 356,000 workers to payrolls over the last month. Total weekly hours worked has reached its highest level since the onset of Covid and average weekly earnings jumped 7.3 per cent in June.

However, not everything is rosy. The number of payrolled employees remains 206,000 below pre-pandemic levels. Vaccines are over 70,000 higher than before Covid, suggesting that firms may be struggling to hire workers.

Labour market tension is building.

“After such a long lockdown freeze, the labour market cannot simply be flicked back on like a switch – that’s why bottlenecks are emerging in some parts of the economy” Nye Cominetti, senior economist at the Resolution Foundation, said.

Data from KPMG and REC underlines the scale of the shortages in the market, with the supply of both permanent and temporary staff falling at the quickest rates on record in June as firms snap up available candidates at a rapid pace.

Uncertainty is a big disincentive

Fragility may be driving candidates away from jobs. The economic damage the Covid pandemic has wrought on many sectors of the economy has intensified uncertainty over firms’ future.

Corporate debt levels have soared as businesses rushed to plug cash-flow shortfalls triggered by an enforced reduction in demand resulting from restrictions to curb the spread of the virus.

As a result, reticence to return to jobs may be high among furloughed workers due to concerns that their roles are at risk of disappearing. These fears are most acute those leisure and hospitality workers, an industry which has absorbed the harshest income shocks during the pandemic. Worries are being compounded by their potential exposure to a deadlier strain of the virus.

“Labour shortages are most acute in sectors that have reopened from almost complete closure during lockdown, that rely heavily on migrant labour, and who recruit heavily from a still largely unvaccinated younger workforce” Cominetti stressed.

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

Wages are rising in the hospitality industry as firms increase starting salaries to attract candidates, according to KPMG UK’s chief economist, Yael Selfin. Financial strain is acute among these businesses 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 assign greater value to work / life balance. People have been able to spend more time with loved ones and pursue personal interests, triggering a realignment of career goals.

Research from Aviva shows the pandemic has made 47 per cent of people care less about their career progression.

Early retirement rates among older workers have jumped, possibly due to soaring asset values – particular house and share prices – since the onset of Covid. Younger workers are re-entering education to improve their skills to make themselves more attractive to employers, Selfin highlighted.

All these factors are creating a vacuum in the labour market.

It’s a workers’ market

Bargaining power is accruing to workers as firms scale their capacity to cope with a rush of consumer spending.

For the first time in a long time, the jobs market is weighted heavily in favour of workers, meaning some could be holding out for better offers from other firms, delaying their return to the workforce.

Anecdotal evidence is emerging that shows businesses are strengthening incentives in a bid to attract talent. Some financial services firms are reportedly increasing starting salaries by 20 per cent and offering one-off bonuses of almost $40,000 to attract junior staff.

And the data supports this. Excluding furlough fluctuations, the ONS estimates underlying pay growth is between 3.2 and 4.4 per cent, meaning wages are rising in real terms.

Experts have stressed that supply and demand imbalances in the labour market will ease once the furlough scheme is fully wound down.

Incentives to return to jobs will harden, which should usher people back into the labour market. Businesses are likely to have found ways to resolve capacity constraints, meaning demand for staff will not be as high, putting downward pressure on wages. In theory, inflationary pressures will not surface as firms eat into this spare capacity.

But, Selfin urged that some sectors will experience ongoing labour constraints, such as IT and social care, due to a skills shortage.

Getting people back into work before the income support measures wind down completely will help avoid an unnecessary spike in unemployment, Cominetti thinks.

“The number of people of furlough needs to fall sharply as the scheme is wound down as those still on furlough in late September are at great risk of unemployment.”

Eliminating supply constraints is not guaranteed

Eliminating labour supply constraints is not guaranteed. Evidence in the manufacturing sector shows shortages of raw materials are persisting for longer than first thought, while US services businesses have been struggling to hire workers for several months now.

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

If workers do not return as expected, and supply chains are not restored to their pre-pandemic state, prices may continue to rise, eating in consumers’ real income and potentially trigger a pull back in spending.

The economic recovery will suffer if labour shortages prove to be sustained instead of transitory.