UK Economy Special: It's Not Working
The UK is still working, producing and consuming less than it did in late-2019, yet still bumps up against capacity constraints. The weakness on the supply side of the British economy is an urgent concern that caps growth and adds to inflation.
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Despite the fact that the UK is still not working, producing and consuming as much as it did more than three years ago, the unemployment rate is at its lowest level since 1974. There are growing issues with labour supply, with almost a million missing workers relative to the pre-2019 trend. This has resulted in a rapid shift from a buyer's market to a seller's market, leading to a quick rise in wages. Labour looks set to remain a scarce asset in the years to come, which will incentivise firms to hoard labour even as the economic outlook weakens. This presents a challenge for policymakers who must weigh the options of higher inflation or higher unemployment. It is likely they will keep monetary policy tighter for longer in order to quell wage-led inflationary pressures. Inward migration is not seen as an immediate solution unless the government changes its approach.