Wednesday 20 January 2016

UK unemployment falls to decade low rate of 5.1% but rate of annual regular pay growth falls below 2% - we need to rethink what we mean by ‘tight labour market’

We’ve just had the latest official UK jobs market figures from the Office for National Statistics. This is the first set of 2016, though the data mostly cover the three months September to November of last year. And the picture is broadly in line with the recent trend.

Employment continues to very grow strongly, with 267,000 (+0.9%) more people in work compared with the previous quarter. Employees account for 60% of the latest quarterly increase, full-time employees for 42%. The overall rise takes the total number of people in work to 31.39 million, lifting the working age employment rate to 74%, higher than at any time since comparable records began in 1971. Unemployment meanwhile is down 99,000 on the previous quarter, to 1.675 million, alongside a fall of 93,000 (to 8.92 million) in the number of economically inactive people of working age.

The unemployment rate (5.1%) is now lower than at any time for a decade but still not triggering higher wage pressure. Indeed the rate of annual nominal pay growth has slowed again (down to 1.9% excluding bonuses, which is the best measure of underlying pay pressure). This suggests that the rate of unemployment consistent with the Bank of England’s 2% inflation target has fallen significantly over time; a generation ago most economists reckoned this so-called sustainable unemployment rate was around 10%. Consequently we need to rethink what we mean by a ‘tight labour market’.

Some commentators continue to talk as if the labour market is already very tight, citing indicators such as unfilled job vacancies (currently standing at around 750,000) and employers’ reports of mounting skills shortages. The implication is that the Bank of England ought to be considering raising interest rates sooner rather than later, notwithstanding caution induced by the state of the global economy as highlighted only yesterday by the Bank’s at present dovish Governor Mark Carney. But the pay data simply don’t support a hawkish view. Unemployment may now have to fall to a very low rate, perhaps below 4%, before we see strong upward pressure on pay. For the time being the labour market isn’t tight, just recovering. Monetary policy should support this not stymie it.

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