Britain’s workforce shrinks as employers battle higher wages, new survey shows


Britain’s workforce is shrinking at the fastest rate since lockdown as demand slows and surging wage bills put pressure on hiring budgets.

Companies are reducing headcounts at the fastest pace since January 2021 when the UK was in the throes of its final lockdown, according to the S&P Global purchasing managers’ index (PMI).

Businesses in the service sector, which makes up the bulk of the economy and covers everything from banking to waiting tables, are driving the reduction in the size of the country’s payroll.

Companies are not replacing staff who leave to help them cope with a sharp rise in wage bills. Wages rose at the fastest pace on record in the three months ending in July, at a rate of 8.5pc

Tim Moore, from S&P, said: “Some firms noted that strong wage pressures had led to the non-replacement of voluntary leavers.”

Demand for services is also slowing and Mr Moore added that companies had reacted to lower volumes of work and declining backlogs by “putting the brakes on hiring plans in September”.

A slowing economy is making it harder for companies to pass on the cost of higher wages to customers through higher prices.

Mr Moore said: “There were reports that higher fuel prices and wage bills had pushed up prices charged across the service economy, but service firms often suggested that competitive pressures had eroded pricing power.”

The findings suggest the recent run of record wage increases is now putting pressure on companies’ bottom lines.

Employers have had to rapidly raise wages to compete for workers amid soaring inflation and a tight labour market.

However, there are signs that the intense competition for staff may be easing. The unemployment rate has risen from a low point of 3.5pc last summer to 4.3pc today.

The PMI survey will be reassuring to rate-setters at the Bank of England who have been concerned that rising prices in the services sector could embed inflationary pressures.

Martin Beck at EY ITEM Club said he was increasingly confident the Bank of England would hold interest rates steady at 5.25pc in November as a result of the “combination of weaker activity, falling employment, and lower balances for costs and prices” suggested by the latest survey.

A separate, broader, S&P survey found the entire private sector is slowly gliding deeper into an economic downturn, with sentiment at its weakest level since January.

Purchasing managers across the economy said their output was declining as a result of more risk averse attitudes among clients and higher borrowing costs.

Some economists took the gloomy data as a sign the UK was starting to slide into recession.

Alex Kerr from Capital Economics said the surveys were not “perfect or reliable on their own” but added: “Altogether they appear to suggest that the economy has lost momentum and may be dangerously close to a recession.”

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