Wednesday, 17 June 2015

Inflation free/jobs rich economy delivering above ‘normal’ rate of average real weekly pay growth despite flat-lining productivity – but this exceptional combo is unsustainable

The Office for National Statistics (ONS) has this morning released the latest set of UK labour market data, mostly covering the three months February to April 2015.

The strong labour market recovery continues. The number of people in work increased by 114,000 to 31.05 million in the quarter – despite public sector employment falling by a further 22,000 in Q1 to a new record low of 5.37 million on comparable figures - though against the backdrop of a rising population and an increase in the number of people participating in the labour market the employment rate dipped a little to 73.4%. According to the ONS’ quarterly workforce jobs measure, the service sectors as a whole averaged a rate of jobs growth of 2.2% in Q1 2015, compared with 1.3% in manufacturing, 0.4% in construction and 0.5% for the economy as a whole.  

Unemployment meanwhile fell by a further 43,000, the unemployment rate down to 5.5 per cent, ever closer to the pre-recession low. With job vacancies also at a near record high the rate of growth of average weekly earnings growth (both including and excluding bonuses) has increased to 2.7 per cent, excluding bonuses faster than at any time since the depth of the recession in early 2009, against a backdrop of near zero CPI price inflation. Average weekly pay increased by 3.2% in the private sector and 1.0% in the public sector, the rate of growth being relatively strong in construction (4%) and wholesaling, retailing, hotels and restaurants (3.9%).  

For the time being therefore the UK economy is delivering more than what prior to the recession was considered a ‘normal’ rate of real wage growth of around 2.5% even though labour productivity is still effectively flat-lining.  However, this exceptional combination of circumstances is unsustainable. With price inflation at some point set to rise back toward 2% a continuation of real wage growth at the current rate will have to be earned by a return to a more normal rate of productivity growth; if not there will eventually be renewed upward pressure on prices and, ultimately, interest rates. In recent months UK workers have benefited from an economy merely mimicking a strong underlying recovery. We should enjoy this while we can. But a genuine sustained recovery will need to be based on higher productivity.

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