What Impact Will Inflation Have on the Labour Market?

With inflation at a 40-year high, UK workers’ living standards are being eroded. But what effect can we expect this to have...

Victoria Crisp

18 August 2022

3 min read

With inflation at a 40-year high, UK workers’ living standards are being eroded. But what effect can we expect this to have on a previously hot job market?   

12 months ago, employers probably felt things couldn’t get much worse: they face unprecedented staffing shortages, forcing wage increases and even bonuses for previously cheap labour and “low-skilled” work. These problems have persisted. But soaring consumer prices have added fuel to the fire. Food costs have increased more than 8%, while energy bills continue to surge – with a total increase of roughly 150% in the last year. 

As a result, wages are falling in real terms at a historic rate, failing to meet inflation and leaving 30% of employees unable to cover their living costs. Employers are now simultaneously struggling to fill key roles and manage existing staff demands. Their teams want greater support in the face of a cost of living crisis. 53% of employers believe that the UK is entering a new, ‘more unstable’ period of employment relations.    Here are five trends we believe will define the job market in the coming 12 months:

1. Retention struggles

As employees look for any way to increase their income, employers will face a mammoth task of holding onto workers.  Over three-quarters of employees say they are considering changing jobs because of inflation pressure, and a fifth of mid-sized businesses said retention problems are the biggest threat they face.

2. More industrial action

Along with increased attrition, employers will begin to see growing threats of unionisation and industrial action. We have already seen how rail workers’ strikes can wreak havoc, and 42% of employers expect to face increasing levels of industrial action over the next 12 months.

3. Increased “fringe” benefits

Many businesses will be unable to offer the wage increases employees need, and will instead turn to so-called “fringe benefits” to ease pressure for workers. 38% of employers plan to increase their benefits in the next 12 months. But research shows that the poorest workers actually have the least access to benefits. The CIPD suggests this could be resolved by an increased emphasis on things like childcare vouchers, discount cards or vouchers, interest-free loans and access to wages before payday.

4. Greater employee flexibility

As employees increasingly take on extra work and side hustles to cope with climbing costs, employers will have to provide the flexibility that allows them to do this.  19% of employees have already taken on a second job to cope, and numerous studies suggest this number will increase in the coming months. To do this, they will require greater control over when they work, as well as how often.

5. Temporary workforce growth

Temporary work has already been growing since the pandemic. But as more employees embrace temporary work as a second source of income, businesses will increasingly shift to a “blended” workforce model. Indeed Flex’s research has found that a third of workers intend to start doing temporary work on top of their existing job to cope – and a fifth of those already doing temporary work plan to take on more shifts. 

This may prove mutually beneficial: employees will be able to access low-commitment work, helping to alleviate living costs, while employers will be able to unlock efficiencies in their staffing costs by utilising more temporary labour.  Ultimately, we predict the trend to accelerate a larger shift towards “blended” work, where a smaller permanent workforce is supplemented by a pool of temporary talent. 

You can read our guide to the model here.