Wednesday, 13 November 2013

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.