Today sees what has become the most important UK data series is issued and if we were in any doubt about that the Bank of England has continually reminded us of that in 2015. Only on Monday Deputy Governor Shafik told us this.
I will wait until I am convinced that wage growth will be sustained at a level consistent with inflation returning to target before voting for an increase in Bank Rate. In this sense, I will proceed with caution.
So we see that wage rises are currently at the front of the queue for providing us with Forward Guidance. However Nemat Shafik appears also to be loading the dice somewhat in terms of the fabled Bank Rate rise.
The recent plateau in wage growth despite the ongoing recovery is one example
Also remember the “never believe anything until it is officially denied” of Jim Hacker fame?
It has never been the intention of the MPC to retain indefinitely the stock of assets purchased as part of QE.
How has the labour market done?
If we look at the quantity measure then there has been an excellent performance and one which left naysayers with egg on their face as employment rose and unemployment fell. Of course it left Governor Carney with egg on his face as he used an unemployment rate of 7% as an indicator just as it surged through that to the current 5.2%. Overnight the Financial Times has published new data which suggest that our progress on the quantity measures remains far better than we would have expected considering numbers like Gross Domestic Product.
Companies added jobs at the fastest rate for at least two decades in 2014-15, almost 700,000 across the UK, according to new research.
The analysis of job creation and destruction in the private sector in the 12 months to March 2015 by the Enterprise Research Centre found a net 695,500 positions were created. Growing companies hired 2.52m people, while 1.83m jobs were lost.
Good news indeed and something which pre credit crunch we would have been ecstatic about. However the numbers themselves have been challenged in the grounds of underemployment rather than unemployment with the associated issue of zero hours contracts. Also the relationship between employment growth and wages has changed because we have a long way to go to get back to the previous real wage peak. We are left with the question which is how much has changed here as we note the good of employment but wonder if the bad side is that wages have shifted onto a lower path? Let us hope that it is not as low as interest-rates.
Today’s official data has again reminded us of the positive ying of the UK’s employment and unemployment situation.
The employment rate (the proportion of people aged from 16 to 64 who were in work) was 73.9%, the highest since comparable records began in 1971………There were 22.88 million people working full-time, 338,000 more than for a year earlier. There were 8.42 million people working part-time, 167,000 more than for a year earlier.
These are another set of strong numbers and we note that the fear from the early days of the improvement that it was mostly in part-time jobs has ebbed away as full-time job creation has pushed ahead. Although there is the nagging worry that the full-time definition is tenuous at best (you say you are….).
Also we see another credit crunch era landmark for unemployment and in a good way.
The unemployment rate was 5.2%, lower than for a year earlier (6.0%). It has not been lower since the 3 months to January 2006.
These have underperformed in the credit crunch era and today’s numbers have reminded us of the issue again today. UK real wages using the official CPI inflation measure peaked at 118 in April 2008 and at the end of October they were at 111.4 or 5.6% lower. So we are still singing along with Kate Bush on this front.
Be running up that road,
Be running up that hill,
Be running up that building.
Whilst we continue to see wage growth in 2015 there has been another sign of some fading of the strength of it.
Comparing the 3 months to October 2015 with the same period in 2014, real AWE (total pay) grew by 2.4 per cent, compared with 2.9 per cent in the 3 months to September.
In essence wage growth is real wage growth right now if we use CPI and around 1% lower if we use RPI and the fading theme was reinforced by the fact that the October number of 1.9% was not only pulling downwards but the weakest monthly number since February as well as being the first number since then to be worse than its 2014 counterpart. If we look at the theories related to the Phillips Curve then I am sure we have thrown them on the scrap heap more than once but they are again exposed here. Also for five years now I have critiqued the “output gap” theories which the Bank of England has pumped out again and again. As the labour market has very little “output gap” and wage growth is fading it is breathtaking that some still cling to it like a raft in white water.
The Resolution Foundation has tried to look forwards to 2016 and their overall conclusion was somewhat downbeat on this front too.
our central scenario has pay growth back down to 2.1% by the end of 2016.
They have developed a decent track record and express fears over what may happen in 2016 as they decide that the low inflation and tightening labour market influences on pay will decline..
Looking to 2016 and beyond, hanging our hopes on either of these would be both a roll of the dice and an exercise in diminishing returns, highlighting the importance of productivity keeping pace with inflation in the longer term.
As it happens today’s figures also pose a question about the new improved trend for productivity growth. If we look at hours worked we see this.
Total hours worked per week were just over 1 billion for August to October 2015. This was: • 6.2 million (0.6%) more than for May to July 2015 • 8.8 million (0.9%) more than for a year earlier.
If we look back we see the annual situation has some growth as GDP rose by 2.3% on a year ago making for a 1.4% productivity rise but if we come really up to date with the NIESR saying we have 0.6% quarterly GDP growth that means no productivity growth if hours also rose by 0.6%. Has the flowering seen an autumn chill and faded?
Last time around I suggested that the UK labour market was in a Goldilocks type position although I should have made clearer that I meant relatively for the credit crunch era. Today has seen a clear example of the porridge being just right as we note continued employment growth and falls in unemployment.
However we bite on some salt in the porridge when we note that wage growth has been fading for the past 4 months now (3.6%,3.2%,2.1% and now 1.9%). Has the fall in the inflation numbers influenced this? Also it is a rough and ready calculation but future wage growth prospects are likely to be affected by the apparent end of the productivity blooming. This returns us to the long-running theme on here of real wage growth being in an overall downtrend that if we look back started before this century began. Unless we see a 2001 style “something wonderful” we seem unable to shake it off.
As we turn into 2016 then we are likely to see real wage growth continue if nothing else because if commodity prices remain at these levels inflation will be subdued but one day even the official bodies will have to face up to the fact that the credit crunch provided a paradigm shift in wages. Also we should not forget that there are plenty of issues with the data we receive including the fact that the wages numbers exclude the 4.61 million and rising who are self-employed.
There is a big event tonight so please those of you who are Star Wars fans enjoy! Also around 7 pm UK time something long promised by the Federal Reserve seems on the cards……
Chocoholics of a nervous disposition should take care before viewing the picture below.