Shortages of workers drive wages higher, but inflation eats into real earnings

As we enter 2022 the jobs market in Scotland has remained buoyant to a degree no one would have dared hope at the outset of the pandemic. Demand for workers across an array of sectors is at unprecedented levels and yet wages are failing to keep up with inflation, underlining persistent and serious risks to the economy.

While all sectors have seen a robust start to the year, the most noticeable when comparing the opening weeks of 2022 to the end of last year has been a 133 per cent increase in demand for construction workers, a 123% rise in education, and a 110% increase in production and manufacturing.

Increasing business confidence has driven demand for staff across the Scottish economy, with 43% of businesses in December reporting that hiring was more challenging than normal.

The trend of rising permanent staff appointments continued into December, and while the rate of the increase remained high by historical standards, it was the smallest hike seen since April. The increase in demand for temporary workers was the weakest in 16 months, with the emergence of the Omicron variant likely impacting demand for short-term staff.

Looking at the supply of candidates, the number of jobseekers fell once more in December. Here again the rate of decline remained historically high but eased to its lowest since July. An additional contributor to labour shortages is the number of people who have withdrawn from the job market, with the inactivity rate across the UK at 21.2%.

In this challenging context some employers have embraced home and flexible working models as a route to recruiting and retaining staff.

Data from December to January shows that homeworking as a permanent model is greatest in information and communications (70.6%) and professional, scientific and technical activities (39.6%). Rates in other sectors are, unsurprisingly, much lower: just 6.2% in accommodation and food services, and 10.6% in transport and storage.

Moreover, there are dramatic differences depending on the size of the business, with those employing between 10 and 249 people on a rate of 19% versus 49% for those with 250 or more staff.

Given high demand and low availability, salaries have been rising but this has been significantly tempered by the cost-of-living crisis as inflation hits rates not seen since the early 1990s. Adjusting for this, wages from December to January fell by 1.2%, the biggest decline since 2014.

The Bank of England worries that demands for higher wages will lead to an inflationary spiral, which presents a delicate balancing act: how to control inflation through higher interest rates without choking economic growth and going into a recession.

A key issue yet to be faced is that a decade of low interest rates has left households and firms unaccustomed to the consequences of higher borrowing costs. The negative effects of this on businesses and families could be substantial if it persists.

Gavin Mochan is managing director of s1jobs.