The UK labour market is booming Goldilocks style

Let me open by bringing you up to date with the latest attempt at monetary easing from the Bank of England. Yesterday it purchased some more UK Gilts as part of its ongoing Operation Twist effort.

As set out in the Minutes of the MPC’s meeting ending on 6 February 2019, the MPC has agreed to make £20.6 billion of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 7 March 2019 of a gilt owned by the Asset Purchase Facility (APF)……….The Bank intends to purchase evenly across the three gilt maturity sectors. The size of auctions will initially be £1,146mn for each maturity sector.

Yesterday was for short-dated Gilts ( 3 to 7 year maturity) and today will be for long-dated Gilts ( 15 years plus). Why is this extra QE? This is because you are exchanging a maturing Git for one with a longer maturity and thus means QE will be with us for even longer. Odd for an emergency response don’t you think?

Regular readers will be aware that I wrote a piece in City-AM in September 2013 suggesting the Bank of England should let maturing Gilts do just that. So by now we would have trimmed the total down a fair bit which would be logical over a period where we have seen economic growth which back then was solid, hence my suggestion. Whereas we face not only a situation where nothing has been done in the meantime but today’s purchase of long and perhaps ultra long Gilts ( last week some of the 2037 Gilt was purchased) returns us to the QE to Infinity theme.

This area has been profitable for the Bank of England via the structure of UK QE as it charges the asset protection fund Bank Rate. So mostly 0.5% but for a while 0.25% and presumably now 0.75%. In the end the money goes to HM Treasury but if you get yourself close the the flow of money as Goldman Sachs have proven you benefit and in the Bank of England’s case you can see this by counting the number of Deputy-Governors. Also its plan to reverse QE at some point continues in my opinion to be ill thought out but for now that is not fully pertinent as it has no intention of actually doing it!

UK Labour Market

In ordinary times the UK government would be putting on a party hat after seeing this.

The level of employment in the UK increased by 222,000 to a record high of 32.71 million in the three months to January 2019……..The employment rate of 76.1% was the highest since comparable records began in 1971.

As you can see a trend which began in 2012 still seems to be pushing forwards and poses a question as to what “full employment” actually means? Also let me use the construction series as an example of maybe the output data has been too low. From @NobleFrancis.

ONS Employment in UK construction in 2018 Q4 was 2.41 million, 2.8% higher than in 2018 Q3 & 3.2% higher than one year earlier.

To my question about the output data he replied.

Given the strength of the construction employment data, potentially we may see an upward revision to ONS construction output in Q4 although there can be odd quarters where the construction employment & output data go in different directions.

To give you the full picture @brickonomics points out that different areas of construction have very different labour utilisation so we go to a definitely maybe although that gets a further nudge from the wages data as you see the annual rate of growth went from 3.2% in October to 5.5% in December. So whilst this is not proof it is a strong suggestion of better output news to come.

Let us complete this section with the welcome news that unlike earlier stages of the recovery we are now creating mostly full-time work.

 This estimated annual increase of 473,000 was due mainly to more people working full-time (up 424,000 on the year to reach 24.12 million). Part-time working also contributed, with an increase of 49,000 on the year to reach 8.60 million.

Unemployment

Again the news was good.

The UK unemployment rate was estimated at 3.9%; it has not been lower since November 1974 to January 1975…..For November 2018 to January 2019, an estimated 1.34 million people were unemployed, 112,000 fewer than for a year earlier. There have not been fewer unemployed people in the UK since October to December 1975.

There have been periods recently where we have feared a rise in unemployment whereas in fact the situation has continued to get better. We again find the numbers at odds with the output data we have for the economy. But let us welcome good news that has persisted.

Wage Growth

This was a case of and then there were three today.

Excluding bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.4%, after adjusting for inflation, compared with a year earlier. Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier.

The total wages number which they now call including bonuses had a good January when they rose by 3.7% which means we have gone 4%,3.4%,3.3% and now 3.7% on a monthly basis. For numbers which are erratic this does by its standards suggest a new higher trend. This is good news for the economy and also for the Bank of England which after seven years of trying has finally got a winning lottery ticket. I will let readers decide whether to award it another go or a tenner ( £10) .

As to real wage growth we now have some but sadly not as much as the official figures claim. This is because the inflation measure used called CPIH has some fantasy numbers based on Imputed Rents which are never paid which lower it and thereby raise official real wage growth. Thus if we use the January data it has real wage growth at 1.9% but using the RPI gives us a still good but lower 1.2%

Putting that another way you can see why there has been so much establishment effort led by Chris Giles of the Financial Times to scrap the RPI.

Comment

The UK labour market seems to have entered something of a Goldilocks phase where employment rises, unemployment falls and added to that familiar cocktail we have real wage growth. So we should enjoy it as economics nirvana’s are usually followed by a trip or a fall. As to the detail there remain issues about the numbers like the way that the self-employed are not included in the wages numbers. Also whilst I welcome the rise in full-time work the definition is weak as the respondent to the survey chooses.

Next let me just raise two issues for the Bank of England as it finally clutches a winning wages lottery ticket. It is expanding monetary policy into a labour market boom with its only defence the recent rise in the UK Pound £. Next its natural or as some would put it full (un)employment rate of 4.5% needs to be modified again as we recall when it was 7%.

Those of you who follow me on social media will know I do an occasional series on how the BBC economics correspondent only seems to cover bad news. Sometimes Dharshini David does it by reporting the good as bad.

eyebrows raised as jobs market figs “defy” Brexit Uncertainty BUT 1) hiring/firing tends to lag couple quarters behind activity 2)as per financial crisis, workers relatively cheap so firms may be “hoarding” workers 3)some jobs will have been created to aid with Brexit prep

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20 thoughts on “The UK labour market is booming Goldilocks style

  1. “Those of you who follow me on social media will know I do an occasional series on how the BBC economics correspondent only seems to cover bad news.”
    Two reasons for that:
    1.A conservative government is in power.
    2.BREXIT has still not been resolved, any bad news is attributed to BREXIT, any good news is reported with the opening line “Despite BREXIT…..”

    • Hi Kevin

      I will skip the politics as ever. However I have pointed out to several news organisations that they are in danger of wearing out the “despite Brexit” keys on their keyboard and might want to re-stock.

  2. Full employment wages up everything all right then?

    This is what Danny Blanchflour just tweeted

    @D_Blanchflower
    2 minutes ag
    real earnings for UK jan 2019 jump to £497 versus £525 in Feb2008 so only down 5.3% great….well not exactly”

    • Hi Peter

      I have been having some discussions with Danny today and we were agreeing. So let’s continue in that vein where we were both criticising the review of UK average earnings done by Martin Weale.

      But the rub is that by repeating the official figures and using the Imputed Rent driven CPIH Danny is missing a chance to say that real wages have in fact fallen by more.

  3. As ever with the employment figures I’m with C+C music factory, things that make you go hmm. My song for QE would have to be Limahl and Never Ending Story.

    One point I’d like to make is the definition of Full Employment, Keynes had it as more vacancies than unemployed to fill them wherever you live. The only way to achieve this is the Job Guarantee in my opinion.

    Lastly a word on the economically inactive being at a record low, I’d frame that as a record number of people working that shouldn’t be whether by age or infirmity. It’s a strange world we live in or Mad World as Tears for Fears had it.

    • Hi bill40

      Under your full employment definition we are around half a million short as 1.34 million are unemployed as opposed to 854,000 vacancies. From the chart vacancies are higher than any point since the summer of 2001 and looking at the official chart probably this century.

  4. Great blog, Shaun, as usual.
    You quote the ONS as saying: “Including bonuses, average weekly earnings for employees in Great Britain [for November 2018 to January 2019] were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier.” Trying to duplicate the ONS results, deflated nominal AWE by the CPIH, I arrived at 1.4%, due to rounding error. Using any other deflator one gets lower real wage growth: 1.3% with the CPI, 1.2% with the RPIJ, 0.6% with the RPI, but decent positive growth however one spins it. To my mind, the only one of these deflators that is acceptable is the RPIJ deflator. The increase in real wages using RPIJ rather than the CPIH as the deflator is only 0.2 percentage points lower so a person almost looks like a nitpicker for bringing it up, but the difference was 0.6 percentage points as recently as February 2019, and has been much larger.
    The unemployment rate hitting a low not seen since November 1974 to January 1975 is very interesting. In Canada, the three-month average of the unemployment rate would have hit an “all-time” low in October-December 2018 at 5.6%; our LFS series was reformulated in January 1976, so though the unemployment rate was probably lower sometime in the past, it isn’t obvious from official estimates. The headline estimate for the Canadian unemployment rate is the single-month estimate. It also hit an all-time low at 5.6% in October and November 2018 and wasn’t much above this in February.
    It would be interesting to know why the unemployment rates in both the UK and Canada seem so out of synch with growth rates. Inevitably, it means that labour productivity growth is negative or only very slightly positive. Did a low labour productivity growth chicken hatch a low unemployment rate egg or is there some better way to look at things?

    • Hi Andrew and thank you

      It is interesting to observe the ebb and flow of the CPIH/RPIJ relationship isn’t it? We had a spell when it not only sustained a fair width but then went wider and perhaps we are due a phase of narrower gaps.

      As to your unemployment question I think that there are several routes to an answer.

      1. Economies have shifted towards services which are more labour intensive and usually less capital intensive.
      2. The issue of employment has become more woolly and vacuous and also we have got more bothered about it.
      3. It was a hoped for change in policy that we would employ more people rather than laying them.us off in a down turn. Now we have got it we worry about employment being too high. Human nature at play here I think.
      4. The QE and ZIRP era has contributed by allowing the survival of zombie banks and businesses.

      In different countries we see different numbers with the UK now below 4% and Canada at 5.6%. Is there a good reason that you can think of for Canada’s rate to be higher like that?

      • Thank you for your reply, Shaun. As to why, even at their lowest, Canadian unemployment rates tend to be quite high, there are several possible explanations. First, the big distances in Canada for a relatively small population makes it more difficult for Canadians to move to where the jobs are. Second, ignoring immigrant workers, there are language mobility issues in an officially bilingual country where there are also many people speaking Indigenous languages as their mother tongues. The Canadian unemployment rate would look lower if it were measured using American methods: https://milescorak.com/2012/05/04/the-gap-between-us-and-canadian-unemployment-rates-is-bigger-than-it-appears/
        The unemployment insurance program in Canada, which for some perverse reason the federal government chooses to call an employment insurance program, is poorly designed, encouraging people to remain in high unemployment regions and in seasonal lines of work:
        https://www.fraserinstitute.org/article/more-generous-ei-program-will-increase-unemployment-permanently
        While the links I have provided are old, dating from the Harper government, they are still reasonably descriptive of the current situation.

    • I guess it’s QE because it’s financed by a maturing gilt held in the Asset Puchase Facility. But it isn’t clear if all £20.6bn is coming from the maturing gilt.
      As always, I could be wrong.

      • Hi Eric

        You are essentially correct as the QE holding fell by a bit over £20 billion and is now in the process of being replaced. Also my sympathies to you and anyone in New Zealand about what happened last Friday.

    • Shaun will correct me but I think its like cheap re-fi. You get to sell the short dated ones and buy the long dated ones. The time delay to pay the player is an advantage and captured at very low rates of today rather than those of yesteryear.

  5. “As to the detail there remain issues about the numbers like the way that the self-employed are not included in the wages numbers.”

    I’m not sure I’m ever going to be able to read the word “remain” again without it setting off bells in my head (same for “leave”).

    • Hi Hotairmail and I take your point

      Words can be very powerful as the establishment knows as otherwise the Greek saga would not have seen the “Troika” become the “Institutions”. In another form last night referring to Deutsche Bank I pointed out how “capital infusion” is the new bailout.

      As to your words I hope they don’t spoil this song which I like.

  6. Hello Shaun,

    I am keenly interested on the pressure to raise interest rates as I have posited before that the only inflation measure the BoE is actually measuring is wage inflation .

    Apparently we have it – or not , if the BoE holds back then perhaps the figures are not as robust as some think.

    I think they are somewhat difficult to believe , and anyway , one swallow doesn’t make a global warming prediction true …. 😉

    As for my position – well I don’t think I’m counted as unemployed or economically inactive either…. still no job yet .

    Perhaps we need to see the benefits bill to be sure.

    Forbin

    PS: BoE can’t raise IR – how bizarre ?

  7. Out here in the Alps, one ski company that has been trading for years gone bust, a big global ski co has no bookings in Europe after 29/03, and any bookings covering the 29/03 being massively discounted. No one knows if you could get home I guess?!!

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