It’s a wonderful set of official jobs figures as housing market recovery helps lift number of people in work in UK above 30 million for the first time

The Office for National Statistics (ONS) has released the latest set of UK labour market data, mostly covering the three months to October this year. Christmas always brings us a showing of ‘It’s a Wonderful Life’ but this year the ONS has added to the festive mood by giving us a wonderful set of official jobs figures.

The quarterly 250,000 net increase in total employment is a big as one might once have expected in a full year. Employment is up in all parts of the UK, except Northern Ireland which saw a slight fall in the quarter, with a sharp rise in job vacancies helping an additional 50,000 16-24 year olds into work. And while the overall figure of more than 30 million people in work still leaves the UK employment rate (72%) below the pre-recession rate (73%) it is a landmark worth celebrating, as is the record 10% of over-65s with jobs.

The private sector (employees and self-employed) accounts for the bulk (246,000) of the increase, with jobs in real estate (up 16,000, +2.8% and construction (33.000, +1.6%) particularly strong in the latest quarter, indicating the degree to which the housing market is a key propellant of the UK’s current economic recovery, though manufacturing added 17,000 more jobs too. But surprisingly even the public sector has added 4,000 jobs this quarter, due entirely to net hiring of 10,000 by the NHS. In this context, even the further increase of 25,000 in the number of people working part-time who want a full-time job (to a record high of 1.472 million) may conceal an element of good news if it means more part-timers think there may be more full-time work to be had.  

Equally remarkable is the 99,000 quarterly drop in unemployment, unemployment falling everywhere apart from in London, the South West and Northern Ireland. Especially pleasing is the 19,000 fall in youth unemployment and the 33,000 fall in the number of long-term unemployed. And the number of Jobseeker’s Allowance claimants is down by 36,700 in November. With the unemployment rate now at 7.4% - lower than at any time since 2009 - analysts might have to revisit the odds of the rate falling below 7% sometime next year.

By contrast, the average earnings figures take some of the Christmas sparkle off the jobs figures, with employers keeping a Scrooge like grip on regular pay increases which on the measure published by the ONS today continue at a sub-inflation rate of just 0.8%. However, the alternative ASHE measure published by the ONS last week suggests that earnings might be rising somewhat faster than this, so maybe the New Year will bring a bit more cheer on the pay front too.

Puzzling ASHE data alters the narrative on cost of living crisis, the ‘squeezed middle’, and regional labour market pressures

The Office for National Statistics has just published the provisional findings of the 2013 Annual Survey of Hours and Earnings (ASHE).  There are a number of surprises and puzzles.

The growth in median weekly earnings of 2.6% for all employee jobs (full-time and part-time) between spring 2012 and spring 2013 is considerably higher than the corresponding figure of 1% pay growth indicated by the ONS’ average weekly earnings statistics. The median increase for part-timers (3.1%) was higher than that for full-timers (2.2%), while median hourly earnings increased by 3.4% for part-timers and 2% for full-timers. Although the ASHE findings show pay growing more slowly than CPI inflation (2.4% in April 2013) they therefore suggest a less severe average real pay squeeze and a more limited cost of living crisis than previously thought.

The still very wide hourly pay gap between the top and bottom 10% of earners stabilized last year (both groups seeing a 1.5% pay increase between 2011 and 2012) but middle earners did better, median hourly earnings rising by 2%. The ‘squeezed middle’ were thus less squeezed than higher and lower earners last year. However, the hourly gender pay gap for full-time employees widened again, up from 9.5% to 10%. And median weekly earnings grew by more for private sector (2.3%) than for public sector (1.6%) workers.   

A particularly puzzling feature of the ASHE findings is that they show growth in median weekly pay across the UK regions between 2012 and 2013 to be a mirror image of regional unemployment rates, with unemployment hot spots registering the biggest pay rises. For example, the North East (3.5%), West Midlands (3.3%) and Wales (4.4%) saw much stronger pay growth than regions with less unemployment, with the South East registering no pay growth at all. While the reasons for this require much closer examination – and remember pay levels are higher in low unemployment regions -  the much commented upon post-recession tendency for workers to ‘price themselves into jobs’ does not therefore appear to be evident for all regions in these latest data.

OBR forecasting a ‘jobs rich/pay tight’ outlook for the economy

We’ve just had the Autumn Statement by the Chancellor of the Exchequer and the latest Office for Budget Responsibility (OBR) economic and fiscal forecast:    

As expected, the OBR is more optimistic about prospects for the UK economy in 2013 and 2014 than forecast at the time of the Budget, though it is slightly more pessimistic about the period from 2015 to 2017. While the Chancellor emphasized the OBR’s positive message for this year and next, the OBR is in fact therefore still forecasting a rather subdued outlook for the UK economy for much of the rest of the decade. Moreover, the short-term improvement is driven by higher than expected household consumption, with business investment and net exports weaker than forecast at the Budget. As a result the economy remains on an unbalanced and low productivity growth trajectory.  

Despite this the OBR has become considerably more optimistic about the outlook for both employment and unemployment, which is expected to fall to 7% by the end of 2015. However, this welcome outcome is due to continued weakness in pay growth in the private sector and much slower pay growth in the public sector. The recovery is thus forecast to be ‘jobs rich but pay-tight’. Average earnings are forecast to rise by only 2.6% in 2014, with subsequent improvement still below the rate prevailing prior to the recession, although with CPI inflation forecast to fall back to the target rate of 2% by 2016, the OBR is forecasting an end to the squeeze in real earnings.

Slower than expected public sector pay growth means that the OBR is now forecasting slightly fewer public sector job cuts than at the Budget. But even on the latest forecast, general government employment is forecast to fall by 1.1 million between 2010 and the end of the forecast period and by 720,000 during the current Parliament.

The Chancellor’s announced welfare and employment measures targeted at the young unemployed are welcome but the impact remains uncertain. For example, the cut in employers’ National Insurance contributions for under 21 year olds is likely to involve a considerable deadweight element – reducing the net impact on job creation – and may create a disincentive to hire young people aged between 21 and 24.  

Official jobs data and Bank of England forecasts reflect growing optimism on unemployment but offer little comfort on pay prospects

The Office for National Statistics (ONS) has released the latest set of UK labour market data, mostly covering the three months to September this year. The Bank of England has also published its latest quarterly Inflation Report.

The labour market data are unusually good – these employment figures offer the most optimistic reading since the start of the recession. Almost all the key indicators are pointing in the right direction. The number of people in work increased by 177,000 in the quarter (full-timers accounting for almost 90% of the increase). Unemployment fell by 48,000 to 7.6%, with welcome falls in both youth unemployment (down 9,000) and long-term unemployment (down 19,000). The only obvious downside is that underemployment has increased - the number of part-time workers who want a full-time job has risen to 1.457 million – while the 0.8% rate of growth in regular pay remains well below CPI inflation.   

The combination of much better jobs figures but continued weak pay growth also form the centrepiece of the Bank of England’s Inflation Report. The Bank is far more optimistic on economic growth and unemployment than it was in August, going as far as to suggest that there is an evens chance that the unemployment rate will fall below 7% by the end of next year. The outlook for inflation has also improved, with the 2% CPI target now within sight of the actual figure. However, the Bank remains rightly cautious about the extent of slack in the economy – as measured by both unemployment and underemployment - and prospects for renewed growth in productivity.  As long as underemployment and weak productivity growth remain the order of the day, workers can’t expect much in the way of pay increases even if lower price inflation eases the cost of living squeeze. So don’t be fooled into thinking that the welcome improvement in the jobs figures signals an early end to austerity.

Particular excitement about the chances of the unemployment rate falling below 7% - which the Bank today reiterated would not be a an automatic trigger for higher interest rates – has been caused by the ONS’ latest single month estimate of unemployment, which fell to just 7.1%. But analysis contained in the Bank’s Inflation Report demonstrates that sampling issues in the Labour Force Survey render these monthly estimates both volatile and unreliable. However, with unemployment now such a key indicator in the Bank’s policy of forward guidance on monetary policy, it is surely time for both the Bank and HM Treasury to instruct the ONS to enhance the Labour Force Survey so that reliable monthly estimates of unemployment can be made available. 

Record number in work but unemployment and pay figures tell a different story

The Office for National Statistics has released the latest set of UK labour market data, mostly covering the three months to August this year. The headline employment number is very good – the number of people in work increased by 155,000 (almost all of this full-time work) in the latest quarter and the level of job vacancies is at a five year high. The number of Jobseeker's Allowance claimants fell by more than 40,000 – the biggest monthly fall for 16 years.

However, the subsequent ‘record number in work’ headlines are a tad misleading – the employment rate remains well below the pre-recession peak. And while there are now more vacancies than in autumn 2008 there are still around a quarter fewer vacancies than before the recession hit in spring 2008.

As a result, these good employment figures are having relatively little impact on unemployment, especially youth (16-24 year olds) unemployment which is unchanged on the quarter at still close to 1 million. The overall unemployment rate remains very high at 7.7% and indeed jumped to 8% in the final month of the quarter. Meanwhile, underemployment, as measured by the number of part-time workers who want a full-time job has risen to a record level of 1.45 million.  

This continued high rate of unemployment and underemployment shows that the labour market is not tightening in any noticeable sense and, for the time being at least, remains an ‘inflation free zone’ as far as the Bank of England will be concerned. An unemployment rate of 7% or less, which might trigger an interest rate rise, still looks to be a distant prospect.

The underlying weakness of the labour market is reflected in a depressing fall in wage pressure, with growth in regular pay now running at just 0.8%, way below consumer price inflation at 2.7%. Workers in the public sector are now bearing the brunt of the real pay squeeze, adding to the pain imposed by job cuts in the order of 10,000 per month. This degree of real wage squeeze is not conducive to a strong and sustained recovery in the UK economy. The ‘cost of living crisis’ is an economic crisis.  

The UK’s short-run employment outlook: ‘jobs rich’ or ‘jobs lite’?

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%.              

Job growth driven by real wage squeeze pushes UK down international productivity ranking

The Office for National Statistics (ONS) this morning published its first estimate of how labour productivity in the UK compares with the other major industrialised economies (the G7).

The bad news is that the UK is falling fast down the international productivity ranking. Output per hour in 2012 was 16 percentage points below the average for the G7 major industrialised countries – the widest ‘productivity gap’ for almost two decades (since 1994). The relative improvement in the UK’s productivity performance from the mid-1990s to the late 2000s has clearly gone into reverse in an economy reliant on falling real wages, rather than increased output, as the main driver of employment growth. According to the ONS output per hour in 2012 would have been 15 percentage points higher had the pre-recession rate of growth been maintained. Though some of this latter growth may have been ‘illusory’ in that it was propelled by an unsustainable boom, the UK economy clearly needs in particular a strong resurgence of business investment in order to regain its pre-recession productivity mojo.   

The drop in the UK’s international productivity ranking in 2012 proves that strong employment growth fuelled by falling real wages is symptomatic of relative economic weakness rather than strength. While the real wage squeeze is preferable to even higher unemployment, these latest international productivity figures show the UK economy can’t be deemed to be experiencing a genuine recovery until we see firm evidence of both stronger output growth and rising real incomes.