Brexit: UK workers should brace for higher unemployment and falling real pay, say experts

Consumer spending growth slowed sharply in April - a trend which will begin to feed into weaker demand for workers and cause employment to fall, the EY ITEM Club predicts

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The Independent Online

Unemployment is set to rise and pay packets will be squeezed in the next two years as a Brexit slowdown in the economy begins to bite, according to new analysis. 

Economic activity has held up better than expected since the Brexit vote last June but warning signs suggest that is about to change, the EY ITEM Club said on Monday.

Consumer spending growth slowed sharply in April – a trend that will begin to feed into weaker demand for workers, causing employment to fall for the first time since 2009, the report predicts. Real wages will increase by a “negligible” amount with nominal pay rises largely cancelled out by inflation. 

A survey by the Chartered Institute for Personnel Development released on Monday found that employers are planning to give just a 1 per cent pay boost on average this year – well below the 2.3 per cent rise in prices reported by the Bank of England in March.

Slow pay growth despite increasing numbers of people in work has been one of the hallmarks of the recovery from the financial crisis. Normally, wages are expected to rise as demand for workers increases and supply shrinks.

Increased use of technology and automation could further hamper wage growth as machines replace human beings and more people compete for the remaining jobs, the EY ITEM Club said.

Martin Beck, senior economic advisor to the EY ITEM club, said a shift towards less secure and, on average, less well-paid, part-time and self-employed jobs may have dampened workers’ willingness to demand higher wages.

He added that this was “bad news for the public finances and [presents] another challenge for whoever takes the reins of economic policy after the election”.

Theresa May’s Conservatives are expected to commit to more rights for “gig economy” workers, in the party’s manifesto to be published this week. 

On a visit to a training facility in the south of England on Monday, Ms May will pledge, “the greatest expansion in workers’ rights by any Conservative government in history”. 

The number of people in work grew 1.4 per cent in 2016, but the EY ITEM club says that will fall to 0.6 per cent this year, before shrinking 0.1 per cent in 2018.

However, the report argues that the consequences of an ageing population and lower levels of immigration for the supply of workers will cushion the impact of softer labour demand on the unemployment rate. 

Overall, the EY ITEM Club expects the unemployment rate to rise from 4.8 per cent this year to 5.4 per cent in 2018 and 5.8 per cent the following year.

Mr Beck said: “Slower growth in the workforce may deliver a boost to what has been a long period of insipid productivity growth. With the flow of potential workers slowing, firms are likely to have more incentive to invest in improving efficiency or labour-saving technology.”

Mark Gregory, EY’s chief economist, said businesses, “need to assess how to strike the right balance between allocating capital on skills development, labour savings and labour enhancing technology”.