A cooler labour market is doing more disinflation than speeches

The British labour market is no longer tight in the way that terrified the Bank in 2022 and 2023. Vacancies have been falling. Unemployment has moved up toward 5 per cent. The redundancy rate is higher than it was in the quiet years. Employers tell the Bank’s agents they expect pay settlements around 3.4 per cent this year. That is the cyclical story, and it is why the majority on the Monetary Policy Committee feels able to hold.

The structural story is less comforting. Inactivity remains the scar. A non-trivial share of the working-age population is neither in work nor looking, with long-term sickness still a large part of the explanation. When the unemployment rate dips because participation dips — people leaving the labour force to study, to care, or because they have given up — that is not the same as a healthy market clearing.

Pay is slowing from the top, not collapsing. Settlements clustered between 2 and 4 per cent are consistent with inflation near target if productivity does anything at all. British productivity has not done anything at all for a long time. That is why a 3.5 per cent pay deal can still be inflationary in a firm whose output per hour is flat, and perfectly reasonable in a firm that has finally found a way to do more with the same headcount.

The regional grain matters. London still runs hotter. The old industrial towns, and a good deal of western Scotland, run cooler. A national unemployment rate of 5 per cent can mean a shortage of care workers in one travel-to-work area and a glut of applicants in another. National bargaining and national living-wage paths do not see that texture. Firms do.

Employer national insurance, last year’s Budget decision that firms actually felt, is still working its way through hiring plans. Contacts talk about hours, vacancies left unfilled, and a preference for overtime over extra heads. That is how a tax on jobs shows up before it shows up in the claimant count.

Policy that only watches the unemployment rate will keep being surprised. The useful dashboard is vacancies, inactivity by reason, pay settlements, and hours. If inactivity starts to reverse while vacancies are still falling, unemployment will print higher and the Bank will look clever. If inactivity stays high, Britain will have “full employment” on a smaller labour force, and we will spend another decade wondering where the workers went.