UK wages growth, employment and unemployment all weaken in a worrying sign

Today merges several of our themes as a rather packed diary sees Bank of England Governor Mark Carney give evidence to Parliament just as the latest employment and wages data are released. There are various matters which make have him breaking out in a cold sweat. One is the rally in the UK Pound £ to US $1.266 which even he may be able to talk down. The next is the rise in annual wage growth above 4% which in the past has been regarded as something of a threshold for considering interest-rate increases. Of course that is likely to go the way that the 7% unemployment rate did! That of course raises the next issue of how the unemployment rate has fallen below 4% being chased by an equilibrium unemployment rate which is apparently now 4.25%.

It was only yesterday that I pointed out that Dave ( Sir David to his friends) Ramsden of the Bank of England was still churning out the failed Ivory Tower output gap methodology.

From my perspective, I also think spare capacity might not have opened up that much despite that weakness in underlying growth,

Also tucked away in a really dull speech about longer-term trends Sir Jon Cunliffe made the case for more policy activism.

But, taken together with other changes in the economy – such as changes in the labour market which appear to have led to some flattening of the wage Phillips curve and
changes in the pass-through of labour costs to consumer prices – the probability is that demand management will need to use more tools to stimulate demand in downturns and work harder to prevent macro-economic tail events.

My apologies for their Phillips Curve obsession, but you see he is trying to tell us lower interest-rates are really nothing to do with him and his colleagues and then ask for even more freedom to interfere in the economy! He continues on that path here and “can be overdone” is classic civil service speak where is he taking out a bit of an each-way bet for himself ( but not us).

There is a lively debate over the extent to which aggressive use of monetary policy tools to stimulate demand creates financial stability risks by inflating asset prices and encouraging risk taking and the build-up of debt. My own view is that this can be overdone. There are, as I have said, deep-seated underlying structural drivers of low for long.

Perhaps he learnt all this stuff during his time at HM Treasury ( 1990-2007) which seems to have undertaken a reverse takeover of the Bank of England.

Wages

Today has brought some news that the recent past was not quite as good as we thought it was . Last month we were told that average earnings growth in July was 4.2% but this morning that has been cut to 3.9% which ch-ch-changes the picture somewhat. So now let us peruse this month’s data.

Estimated annual growth in average weekly earnings for employees in Great Britain was 3.8% for both total pay (including bonuses) and regular pay (excluding bonuses).

This means that the Bank of England can let loose a sigh of relief as the 4% wages growth threshold was not in fact in play as we only made 3.9% and have now dipped back to 3.8%. In terms of a pattern we see that since October last week each month with only one exception has seen annual wages growth above 3% so we have moved to a new higher path. Of which August at 3.6% is consistent with that and the detail backs this up.

All sectors except manufacturing saw annual pay growth of at least 3.0%; construction saw the highest estimated growth of over 5.5% for both total pay and regular pay…..manufacturing saw the lowest growth, estimated at 2.7% for total pay and 2.5% for regular pay.

So the numbers are good but not as good as we were previously told and maybe this was a factor.

Public sector pay growth has fallen back below that for the private sector, following higher growth in March to May 2019, impacted by the effect of a different pattern of pay rises for some NHS staff in 2019 compared with 2018.

Real Wages

According to the official rhetoric the position is now rather good.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.9% and annual growth in regular pay is estimated to be 2.0%.

As nominal pay growth is the same I am not sure how they get to that! Let us hope there is a difference at the second decimal place. But the fundamental issue is that it requires the use of the fantasy imputed rent driven CPIH inflation measure to get numbers that high. If we use RPI it drops back to more like 1%.

Also even using it we remain in a depression for real wage growth.

The equivalent figures for total pay in real terms are £502 per week in August 2019 and £525 in February 2008, a 4.4% difference.

Employment

The situation here has been good for seven years or so but this morning indicated the first signs of a wobble.

The UK employment rate was estimated at 75.9%; higher than a year earlier (75.6%) but 0.2 percentage points lower than last quarter……the estimated employment rate for women was 71.6%; this is 0.6 percentage points up on the year, but 0.3 percentage points down on the quarter

I added the detail on women because the change was them. Does anybody have any thoughts as to why this might be so?

We get some more detail from this.

Estimates for June to August 2019 show 32.69 million people aged 16 years and over in employment, 282,000 more than a year earlier. This annual increase was mainly driven by women (up 202,000 on the year), those aged 50 years and over (up 287,000 on the year) and full-time workers (up 263,000 on the year). There was, however, a 56,000 decrease in employment on the quarter, which was the first quarterly decrease since August to October 2017.

Furthermore we seem to be switching towards self-employment again.

However, the latest estimate shows the weakest annual increase for employees since May to July 2012 (see Figure 3), making it smaller than the annual increase for the self-employed.

Unemployment

This has been in a long downtrend but again we saw a change today.

The UK unemployment rate was estimated at 3.9%; this is lower than a year earlier (4.0%) but 0.1 percentage points higher than last quarter…….the level of unemployment increasing by 22,000 to 1.31 million, in the three months to August 2019.

Yet rather oddly considering the pattern of the employment data above it was men that were made unemployed.

the estimated UK unemployment rate for men was 4.0%, 0.1 percentage points lower than last year but 0.1 percentage points higher than the previous quarter……..the estimated UK unemployment rate for women was 3.7%, down 0.3 percentage points on a year earlier but largely unchanged on the quarter.

Comment

This is the first real hint of a possible sea change in the UK labour market which has just seen something of a troika of news. Wage growth is slower than we thought combined with weaker employment and higher unemployment. We still have much better wage growth and the employment levels are very high but if we were the Star ship Enterprise the Captain would be considering pressing the yellow alert button.

The changes in the wages data remind us of the caution that is requited with even official data. Let me remind you that the self-employed and the armed forces are ignored and that companies below 20 people are mostly imputed.

Returning to the Bank of England then they will be thinking of another interest-rate cut whilst Governor Carney emits gens like this.

“The pound is either going to move up or down,” says Mark Carney ( @BruceReuters)

Also he has been contradicting past Bank of England research.

BANK OF ENGLAND’S CARNEY SAYS UK INCOME AND WEALTH INEQUALITY FELL OVER THE PERIOD BOE QUANTITATIVE EASING WAS ACTIVE ( @RedboxGlobal )

 

 

 

 

11 thoughts on “UK wages growth, employment and unemployment all weaken in a worrying sign

  1. Hello Shaun,

    re ” “The pound is either going to move up or down,” says Mark Carney”

    first thoughts , we actually pay this guy for this ? LoL!

    perhaps he should have said ” predictions are difficult , especially about the future ” ( yogi berra )

    Forbin

    • forbin,

      Yes the £ may go up and down and I have been doing a bit of weather forecasting lately, and I think it will either rain or may remain dry dependant on where you are living.

      Yes very helpful economic advice from the head of the Bank of England today. He also said the £ will remain volatile and so would shares dependant on what happens with BREXIT the next few days or weeks, I had already figured that out and many more people will have done also.

      He has said the banks mustn’t take positions on the £ probably due to the risks it poses to the banks.

      He needs to knock his economic barometer to see if it will give a better reading, but to be fair we are in strange times and BREXIT is causing a lot of problems business investment dried up.

  2. Great blog as always Shaun.

    Whenever, the boe acts I always take into account their hidden agenda:

    1. Impoverish the nation via inflation
    2.Destroy savings via ZIRP and inflation
    3. Increase property prices so that homeowners will forever be in thrall to the banks

    If you take those points into account then his actions seem logical.

    However not all is going to plan, we have decent wage increases,the pound is recovering, and the housing market is almost YoY negative. As interest rates are so low they are meaningless, all I can imagine is more printy printy and another FLS style operation. Financial repression must continue 😉

  3. Shaun,

    Firstly can I thank you for pointing out where you got the 0.75% rate rise on the boost to the £. I do remember that but had forgotten the same. So had Danny Blanchflower!

    As to todays data:

    “All sectors except manufacturing saw annual pay growth of at least 3.0%; construction saw the highest estimated growth of over 5.5% for both total pay and regular pay…..manufacturing saw the lowest growth, estimated at 2.7% for total pay and 2.5% for regular pay.”

    Average wage rises now running at 3.8% lower than forecast and unemployment now on the rise which at some stage was bound to happen, I thought unemployment would have been on the rise before now.

    However looking at the wage growth which is a lot lower than forecast, when you look at the last retail price index, which is my preferred measure wages aren’t rising much above the index and that is why retailers are struggling.

    In fact manufacturing at 2.5% is less than RPI !

    I tend to take a lot of these figures with a pinch of salt and many on your blog to, every man and his dog got their own inflation figures and there are many people out there that will be wondering why their cost of living isn’t as good as the data which keeps being released by the ONS.

    Things are that bad on the High Street all the big stores are slashing their prices, the general public wont buy unless they get a discount.

    Carney said today the £ can go either way, well isn’t that a surprise!

    Anything can happen the next few days or weeks the UK public and business very nervous, I for one wouldn’t like to call it.

    • Hi Peter

      No problem it was a pleasure.

      Wage growth has gone from excellent to very good so it should be put in context I think. As you will be aware I think the RPI has plenty of strengths so real wage growth is not as high as claimed but at least we have some. More troubling is the employment fall in my opinion as whilst such things are often regarded as a lagging indicator it was a leading one in 2012 so may be doing the same this time around.

      As for tonight there are so many Brexit rumours it is hard to keep up with it all

  4. Great blog as usual, Shaun.
    You quote the ONS release on AWE as follows: “In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.9%.” I tried to duplicate the official estimates, using the CPIH as deflator, and got a 2.0% rate of change, which is within rounding error. Using the RPI as deflator, the rate of change is much less, only 1.1%; using the RPIJ it is 1.7%. The last is I believe the most reliable estimate. The CPIH is a duck-billed platypus of a deflator: a macroeconomic inflation measure with an imputed rents series tacked onto it. The RPI is a proper household-oriented measure that includes house prices but has a serious upward bias due to the formula effect that the RPIJ removes.
    I may not be able to calculate these real wage estimates deflated by the RPIJ for very much longer. With the August 2019 update of the consumer price indices, the ONS announced:
    “Table 35 of the consumer price inflation tables illustrates the effect of using the Jevons formula instead of the Carli formula in compiling
    the Retail Prices Index. The table was first published in March 2017 and shows the effect on the index, the 12-month rate and the
    one-month rate. The same data are also published as part of the consumer price inflation time series dataset with series identifiers CRFT, CRFU and CRFV.

    “We are now considering stopping publication of these three series but, before taking a final decision, we would welcome hearing about any ways in which
    the data are currently used. In short:

    • How is the formula effect published in Table 35 of the consumer price inflation tables used?
    • Would it cause you significant problems if we were to discontinue publishing the three series?

    “Responses should be sent to cpi@ons.gov.uk.”

    I have already sent my response to the ONS asking for the retention of this table and these series. I hope that you or some of your readers would choose to do so as well. In the ONS article “Clarification of publication arrangements for the Retail Prices Index and related indices”, which announced that the RPIJ series would not be updated with other consumer price indices after the January 2017 update, the ONS wrote: “…IT IS CLEAR THAT THERE IS VALUE IN HAVING A MEASURE THAT SPECIFICALLY ILLUSTRATES THE FORMULA EFFECT ON THE RPI, a purpose that is currently served by RPIJ. For this reason, we will publish an estimate of the formula effect on RPI, but it will not form part of the family of price indices.” (Emphasis added.) It does make one wonder why the ONS no longer believes that there is value in having this measure, less than three years after announcing the opposite. What’s changed?

    • Hi Andrew and thanks

      The treatment of RPIJ by the ONS and the UK Statistics Authority has been nothing short of shameful. I had missed their latest attempt to bury it and frankly the whole story shows that it was merely a side show. Whereas RPIJ is a better inflation measure than the imputed rent driven CPIH as its original description shows.

      RPIJ – a variant of the RPI which is calculated using formulae
      that meet international standards

      Why has it been removed? Because they do not want people to have any idea of the true impact of owner occupied housing inflation.

      A proper debate should be around a new improved RPI because if it been modernised I think we would be discussing much smaller issues than we are. RPIJ would have got much wider acceptance than CPIH.

      I will be happy to write to the ONS.

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