Labour market continues to improve - manufacturing leads the way

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ONS stats released today show more of the same for the UK labour market - rapidly decreasing unemployment amidst an environment of protracted low wage growth. 

Unemployment continues on a downward spiral

The unemployment rate fell to 6% in the three months to August, the lowest since late 2008. There were 1.97 million unemployed people, 154,000 fewer than for March to May 2014 and 538,000 less than a year earlier in what is the largest annual fall in unemployment on record. At this rate unemployment is on track to fall to 5.3% in 2015 - the rate of unemployment just before the economy peaked in 2007.

The rosy picture in vacancies for the manufacturing sector persists with a further 12.1% growth on quarter. The yearly growth in manufacturing vacancies is now 38.5%. However, employment in manufacturing could somewhat cool in the final quarter of Q4 to fall in line with the wider slowdown in the sector coming out from this month’s PMI figures.

Earnings still lagging (well) behind the inflation rate

Earnings continue to lag behind the inflation rate despite inflation being on a free fall – retreating to 1.2% in September. Average weekly earnings (regular pay) were 0.9% higher than a year earlier seeing a 0.4% increase on month and 0.1% rise on the three month average. Nevertheless, earnings are still 0.6 percentage points below the inflation rate at 1.5%. 

What about slack?

Earnings data should provide the BoE with further confidence that there is still enough slack in the labour market to hold-off a hike in rates. It might raise the alarms for George Osborne however, as sluggish wage growth adds to the worrying outlook for public finances via subdued levels of income tax. 

A good indicator of the degree of slack in the labour market is the portion of temporary workers and part-time workers that could not find a full-time job. This figure increased 2.5% on quarter and 1.4% on year. The proportion of temporary workers that could not find permanent work now stands at 36.4%, up from 35.7% for March to May 2014. Average hours worked, another indicator of slack, are also down 0.1% on quarter and have stayed completely flat (0%) over the year.

Manufacturing a silver lining for earnings

The manufacturing sector remains a positive outlier for wage growth. Average weekly earnings (regular pay) grew by 1.7% over the month at £540 per week compared to £452 for the whole economy. This puts manufacturing earnings at 0.8 percentage points above the 3 month average for whole economy earnings.

Average-weekly-earnings-month-on-month

In fact, between Q1 2008 and Q2 2014 manufacturing earnings growth has trended 0.5 and labour productivity 0.3 percentage points above the whole economy average. To put that into perspective, earnings and labour productivity in the services sector have been 0.05 and 0.03 percentage points higher than the national average during the same period. This means that productivity and wage growth in manufacturing have outperformed the services sector by a ratio of roughly 10 to 1 in the post-crisis period. 

labour-productivity-output-per-hour

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