Productivity is Still the Key Weakness

Data published by the ONS on Wednesday showed the labour market continues to perform strongly. Total employment has now reached 30.39 million; an increase of 2.3% on the year before and 1.46 million since May 2010. Crucially, this increase in employment is not being solely driven by population growth – the employment rate has seen a sharp rise to 72.6%, a level not seen since mid-2008. The unemployment rate also fell below 7% which had previously been the threshold set by the Bank of England (subject to a few caveats) at which point it might consider embarking on a path of monetary policy normalisation. The number of unemployed people has fallen by 12.5% over the last year.

It is clear that the sustained improvements in the labour market are more than simply a cyclical rebound. Even before the latest data was released, the OECD comparison of employment rates showed that since Q1 2011, the UK employment rate has grown a full percentage point more than the OECD average. The inactivity rate fell to 21.9%, the lowest it has been since 1990. This sharp fall must to some extent reflect the impact of welfare and tax reforms which have encouraged people to enter the labour market.

Nominal wage growth also increased to a 3 month average of 1.7% compared to last year. Month-on-month nominal wage growth was 1.9%, which suggests acceleration in the coming months. Some commentators highlighted the fact that without bonuses, regular pay grew by 1.4% and thus was less than the 1.6% CPI inflation for March – the suggestion being that bonuses in the City make the wages data seem better than they actually are for most people. This argument does not carry much weight because the biggest increases in bonuses over the year came from construction and manufacturing which grew by 10.2% and 12.8% respectively. Bonuses in Finance grew by only 1.1%. Whilst bonus levels are not equivalent across different industries, it is still important to consider them.

There are other signs of tightening in the labour market; vacancies for example rose to 611,000 which is the highest number since August 2008. Consequently, it seems quite likely that nominal wage growth will continue over the short term. Sterling appreciation and the lack of commodity price spikes mean the immediate outlook for inflation is relatively sanguine. As a result, short term real wage rises are likely to continue.

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Tim Knox, Adam Memon - Thursday, 17th April, 2014