The UK Labour Market puzzle

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Today's labour market report show sustained employment gains but wage growth remains weak.

Unemployment rate unchanged at 10-year low

The UK labour market’s resilience continued in the final month of 2016. Employment gains remained strong, growing by 37,000 in the three months to December which more than offset the 9,000 fall in the previous quarter. The number of unemployed people declined by 7,000 while the unemployment rate remained unchanged at just 4.8% – a 10-year low.  

2017-02-15-Employment-and-unemployment-rate 

It not all good news

The surprise came from the growth in average weekly earnings, which showed an unexpected weakness in the last quarter. In December, the three-month average growth in average weekly earnings was down 0.2 percentage points to 2.6% for the economy as a whole. The slowdown was sharper for the single month growth rate, which fell to 1.9% in December down from 2.9% in November – although monthly figures tend to be erratic.

When accounting for inflation dynamics over the same period, the three-month change in average weekly earnings fell to 1.4% in December from 1.9% in November.

Why is it a puzzle?

The steady decline in the unemployment rate seems to have little impact on workers’ bargaining power. While the unemployment rate is now more than 4 points lower than its peak during the financial crisis and is edging lower than pre-2008 level, growth in nominal wages remains significantly weaker than its pre-crisis trend. Indeed, firms remain cautious in balancing the scarcity of workers and the need to offer higher pay levels to retain workforce. This is unlikely to reverse in the year ahead, given the heightened uncertainty about business conditions.

2017-02-15-lab-market-puzzle 

The other key factor affecting wages is productivity. According to the ONS flash estimate, UK productivity grew by 0.3% in the final quarter of 2016, weakening from the previous quarter growth rate of 0.4%. This performance is likely to have weighed on employers’ intention to offer higher pay rises.

These developments prompted the Bank of England to revise its judgement on the labour market. In its February Inflation report, the Bank pointed out "the presence of a greater margin of slack in the labour market, restraining wage increases". In other words, the Bank now believes there is more room for the unemployment rate to fall before firms are forced to pay higher salaries to retain or attract skills into their business.

Wage growth weakness across manufacturing looks set to continue in 2017

Growth in earnings in manufacturing showed a similar weakening pace of growth in the final quarter of 2016, with the three-month average growth rate coming in at 1.7% down from 2.2% in November. After a period of sustained expansion where wage growth across the sector outpaced that of the economy as a whole, manufacturers are turning more cautious when it comes to pay rises.

This is likely to continue into the year ahead. Our freshly released Pay Bulletin covering the January major bargaining round shows the average pay settlement for the three months to January at 1.9%, fractionally higher than the 2016 average of 1.8%. Moreover, the uptick reflects that more settlements are resulting in pay rises, while the vast majority of pay deals are agreed at or below the 2%-3% range.

These trends also chime with our Exec survey results, where upward pressure on pay settlements was less of a concern for manufacturers going into 2017.

2017-02-15-Pay-settlements 

Tell us your view – our Manufacturing Outlook Survey is currently out in the field. Please look out for it in your inbox – if you haven’t yet been invited to, but are keen to tell us what’s happening in your business drop our research team a line at research@eef.org.uk   

 

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Economist

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