Remarkably strong quarterly surge in employment helps boost regular pay growth

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months December 2014 to January 2014.

The remarkably strong quarterly 248,000 rise in employment indicates a surge in the pace of job creation at the end of last year, helping to cut unemployment by a further 76,000 to a rate of 5.6%. People working full-time account for two-thirds of the total rise in employment this quarter, most of whom are employees on permanent contracts. With the number of people in work now above 31 million the working age employment rate has risen to 73.4%, a new record.

The fact that very strong employment growth had only a relatively modest impact on unemployment in the quarter is explained by a large fall of 104,000 in the number of economically inactive people, itself likely to be an indication of improved labour market opportunity.

A further fall in unemployment combined with both a record employment rate and record job vacancies (up 32,000 in the quarter to 743,000) has also given a boost to the rate of growth of regular pay (i.e. average weekly earnings excluding bonuses) which has increased from 1.6% to 1.8%. Regular pay growth is a better indicator of underlying wage pressure than total pay (including bonuses), the rate of which fell from 1.9% to 1.7%.  

Together with zero price inflation, the jobs boom is helping improve real incomes despite the fact that nominal wage pressure remains subdued. However, the rise in employment and real wages continues to mask severe underlying weakness in labour productivity. This will have to improve markedly if the current recovery in living standards is to be sustained into the medium and long-term.

Record jobs but we’re only just back to normal hours

During the course of the UK General Election campaign the Conservatives and Liberal Democrats have pointed to the number of jobs created since 2010, while Labour and many of the minority political parties instead emphasise the squeeze on real earnings. As a result, I’m often asked why a record employment rate has yet to trigger an obvious economic feel good factor. There are several ways of looking at this but something that is often overlooked is the average amount of work people are doing, which has only just returned to what was considered normal prior to the recession.

At the start of 2008, just before the recession struck, UK workers were on average working 32.2 hours per week. This was around the average for most of the 2000s and around an hour less than the average for the 1990s, the fall over the decade due to a shift toward jobs offering shorter hours. At the time of the last General Election in 2010 this figure had, in the wake of the recession, fallen to 31.6 hours – a loss equivalent to almost a week’s work over the course of a year, which is clearly enough to make the average worker feel worse off.

Since then average hours have risen again but (by the end of 2014) were only back to where they were just before the recession i.e. 32.2 hours per week. This is despite lots more jobs being created and a record employment rate, reflecting the fact that there has been a further shift toward jobs offering shorter hours. However, for most of the period during which average hours were returning to normal the amount people were on average earning for each hour they worked was also falling in real terms. The lack of a noticeable feel good factor is therefore understandable.

For the average worker to feel as well off as before the recession we will thus have to see either an increase in the length of the average working week (say taking it back to where it was in the 1990s) or higher productivity per hour worked in order to boost hourly earnings. Assuming that most people would prefer to work smarter rather than harder (i.e. enjoy an improvement in their overall economic and social well-being) this suggests that measures designed to raise productivity and pay per hour should be at the centre of the General Election debate. Sadly, despite lots of rhetoric about the situation of ‘hard working families’, such measures are a best only implicit in much of what we have heard from our politicians in the election campaign so far.