A lot of economists at present reckon the new Bank of England Governor, Mark Carney, is too pessimistic in his current expectation that it will be almost three years before the UK unemployment rate falls to 7% (a figure that has acquired totemic status in the emerging era of ‘forward guidance’ when it comes to assessing likely moves on monetary policy). Emerging optimism is based on recent evidence of stronger growth in both output and employment which in recent months has pushed the headline unemployment rate down to 7.7% - already considerably lower than most economists were originally forecasting for the end of 2013. A majority therefore think the 7% unemployment benchmark rate will soon appear on the horizon and be reached by the end of 2014.
This view seems based on the assumption that employment will continue to grow at close to the pace achieved in the summer months, and might even accelerate in the coming months if confidence about prospects for the economy improve still further. Surveys of employers’ hiring intentions – such as the latest Employment Outlook published today by the Recruitment and Employment Confederation – underscore this bullish mood, reporting that as many as 50% of employers intend to expand staff levels in the next quarter.
However, the Bank of England is likely to put at least as much weight on the reports of its own Agents, who talk to organisations around the country and produce a monthly report, the latest issue of which is also published today. This paints a somewhat different account of the short-run employment outlook.
According to the Bank’s Agents, while business activity has improved there were indications of only a ‘slight increase’ in staffing levels over the next six months. Overall, employment was reported to be rising only modestly, and by less than output, so that productivity was gradually improving (which is good news given the UK’s widening productivity gap with other economies, as referred to in my earlier blog this morning). Employment intentions were found to be weakest in consumer services (by far the biggest sector of employment in the economy) where employers were set to respond to increased demand by increasing employee hours rather than taking more staff on. Employment intentions were strongest in construction, a further sign of the degree to which the housing market is leading the emerging economic recovery.
Just why one sees such divergence in indicators of employment intentions is unclear. But if the Bank’s Agents’ report proves right we are heading for a ‘jobs lite’ rather than ‘jobs rich’ recovery, at least in the short-run. If so, at a time of continued strong growth in the supply of labour to the UK economy, it might take considerably longer than a year before we see the unemployment rate fall to 7%.