14 Dec 2016
UK labour market data – pay growth up, jobs trend unclear
Labour market figures released today showed unemployment remaining steady at 4.8% in the three months to October. This was in line with consensus estimates. We had expected a tick up to 4.9%. But a number of other metrics revealed signs of a softening in overall labour market conditions.
Employment fell by 6k over the three months, compared with an increase of 342k during the past year as a whole. Furthermore the split of jobs created showed that full-time working dropped by 51k in the three months while the number of part-time jobs rose by 46k. Similarly the number of weekly hours worked over the quarter edged back by 0.5%. This is against a rise of 0.7% over the year.
Is this a genuine turn in the labour market after a period of robust job creation (an additional 2.7m people are in employment since the trough in early-2010), perhaps as Brexit fears begin to take effect? It is too early to say conclusively. We have long had a mistrust of short-term trends in the labour market numbers. In part, this stems from the fact that survey data will often show some volatility due to sampling quirks. Indeed we note that today’s release shows a 76k increase in labour market inactivity (i.e. neither in nor seeking work). This is very much contrary to recent trends.
On the pay side, today’s figures tend to support our conclusion from last month’s data, namely that wage growth is strengthening. The pace of headline weekly earnings firmed to +2.5% (3m yoy) in October from a revised 2.4% in September (consensus 2.3%, Investec 2.4%). Moreover private sector regular pay growth edged up to 2.8% (3m yoy), its strongest pace since September last year. This broadly chimes with the findings from the latest REC survey which showed permanent starting salaries rising at their fastest pace for six months.
In summary, the two key questions from this release are whether labour market conditions have begun to slacken and whether pay pressures are on the rise, developments which might appear to conflict with each other. Our answers are slightly nuanced in both cases. We view today’s news of a drop in jobs as possibly erratic, the product of a sampling quirk. Nonetheless we consider that a period of relatively slow economic growth will result in a modest rise in unemployment through the course of 2017. Meanwhile wage growth seems to be recovering. This though may simply be an adjustment to an end to the recent period of ultra-low inflation. We suspect that earnings growth will not keep pace with inflation as it climbs above 3% next year. On this chain of events, the economy will not be weak enough to justify an easing in monetary policy, while the rise in inflation is unlikely to be sufficiently long lasting to prompt a tightening. Accordingly the most likely outlook is that the MPC will maintain the Bank rate at 0.25% through 2017.