Wednesday, 12 November 2014

Bank of England signals return to 2% real wage growth next year as more jobs, falling unemployment and vacancies close to pre-recession peak give a boost to pay

The Office for National Statistics (ONS) this morning released the latest set of UK labour market data, mostly covering the three months July to September 2014, while the Bank of England has also published its latest quarterly Inflation Report.

This is the most encouraging set of labour market figures for several months, combining a return to strong employment growth (up 112,000 in the quarter to 30.79 million) with a sharp fall in unemployment (down 115,000 to 1.96 million) and average weekly earnings growth of 1.3% (excluding bonuses), just outpacing the corresponding 1.2% consumer price inflation rate. The count of unemployed people claiming Jobseekers Allowance fell by just over 20,000 in October to 931,700.

On the face of things both the employment rate (73.0%) and the unemployment rate (6.0%) are unchanged from the figures published last month. However, this reflects the 3 month rolling comparison of quarterly estimates from the Labour Force Survey which means change in the latest set of figures for July to September is benchmarked against April to June rather than compared month by month. On the rolling comparison, the employment rate increased by 0.2 percentage points in the latest quarter while the unemployment rate fell by 0.3 percentage points.    

Most significant of all the level of job vacancies (687,000) is now only 9,000 shy of the pre-recession peak, the number of unemployed people per vacancy falling to 2.9. This suggests a tighter jobs market and thus a return to sustained if modest real wage growth in the coming months, though the main beneficiaries will be skilled workers for whom demand is rising faster than supply rather than people in the lower half of the jobs league who will continue to feel the big squeeze. Consequently, higher real wage growth on the average weekly earnings measure may not show up in measures of median earnings.

The prospect of an improved average outlook for pay was reflected by Bank of England Governor Mark Carney in his opening remarks at the Inflation Report press conference. Mr Carney pointed to “encouraging signs in the labour market”, with the Bank now expecting annual real wage growth of around 2% by the end of 2015 as a result of nominal pay growth rising to around 3% against a backdrop of a (well below target) rate of consumer price inflation of around 1% (which also reduces the odds on an early rise in the base interest rate). The boost to nominal pay growth, the Bank reckons, will be due to a combination of unemployment falling further toward the pre-recession rate of just over 5% and a recovery in growth in labour productivity.   

Asked whether this marked the end of the historically long real wage squeeze the Governor, perhaps wisely, commented that “one swallow doesn’t make a summer” and that current economic momentum will have to be sustained.  This is significant given that Mr Carney began the press confidence with the ominous remark “the spectre of economic stagnation” is evident in continental Europe. This explains why the Bank has made a slight downward adjustment to its forecasts for both UK economic growth and inflation. Despite this, however, the Bank reckons the UK economy will grow at an above trend rate in 2014 (3.5%), 2015 (2.9%) and 2016 (2.6%), supported by employment and pay growth, increased business investment and improving consumer confidence. Let’s hope Mr Carney and his colleagues are proved right.  

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