UK employment trends will worry the Bank of England

Today moves us on from the output situation of the UK economy to the employment and wages situation. On the latter we have already received some good news this week. From the BBC.

Thousands of UK workers will enjoy a pre-Christmas pay bump if their employer is a member of the “real living wage” campaign.

Businesses who have signed up to the voluntary scheme will lift their UK hourly rate by 30p to £9.30.

People living in London will see their hourly pay rise by 20p to £10.75.

The scheme is separate to the statutory National Living Wage for workers aged 25 and above which currently stands at £8.21 an hour.

The Living Wage Foundation said its “real” pay rate – which applies to all employees over 18 – is calculated independently and is based on costs such as food, clothing and household bills.

If we look at the wider pay picture we see from the Bank of England that it has been really rather good.

Pay growth has increased steadily over the past few years as the labour market has tightened. Private sector regular
pay growth was 4.0% in the three months to August, as high as it has been in over a decade. The
strength in pay growth has been broadly based, with growth picking up in both the private and public sectors in recent years.

I am not so sure about their “increased steadily” as they have been like the boy ( and occasional girl) who cried wolf on this subject. But we have seen a better phase and it is this that has been a major factor in keeping us away from recession and seeing some economic growth. The fear looking ahead is that it may fade.

A number of indicators suggest that pay pressures are no longer building, and pay growth may cool over the coming
months . The Bank’s settlements database suggests pay awards are clustering between 2% and 3%, slightly
lower than a year ago. Surveys by the REC and the Bank’s Agents also suggest pay growth is stabilising a little below
the pace of growth in the official data.

This may not be as bad for real pay growth as you might think because there are grounds for thinking inflation will decline. The rally in the UK Pound £ will help bring it lower and I note that having improved against the Euro to over 1.16 we should head towards the inflation rate there.

Euro area annual inflation is expected to be 0.7% in October 2019, down from 0.8% in September according to a
flash estimate from Eurostat, the statistical office of the European Union.

Today’s Data

If we start with the wages data then maybe the Bank of England has been right for once. It does not happen often so let’s give them a little credit.

In the year to September 2019, nominal total pay (which includes bonus payments) grew by 3.6% to reach £542 per week. Over the same period, nominal regular pay (which excludes bonus payments) grew by 3.6% to reach £508 per week.

The nuance to this is that it was not so long ago we would be quite happy with this and there were suspicions that the numbers had been boosted by the timing of NHS settlements. The official view on the impact of this is shown below.

Total and regular pay can be expressed in real terms when they have been deflated. We deflate them using the Consumer Prices Index including owner occupiers’ housing costs (CPIH) (2015=100). After adjustment, real total pay increased by 1.8% over the year to £502 in September 2019. Real regular pay increased by 1.7% over the year to £470.

I am pleased they have switched to “we deflate them” which at least gives some sort of hint of the woeful inflation measure they use as it is driven ( 17%) by imputed rents. As it happens because house price growth has fallen back it is not as wrong as usual but is still an over estimate of real wage growth in my opinion.

There was a counter current in the detail because September wage growth at 3.6% was better than the 3.4% of August. The sector pulling it higher was construction at 6%.

A Wages Depression?

If we move to the bigger picture then even using such a flattering and favourable view of inflation cannot escape this reality.

real regular pay was £3 (or 0.63%) lower than the pre-downturn peak of reached in the three months to April 2008 (£473). The real total pay value of £502 in September was £23 (or 4.38%) lower than the peak reached in the three months to February 2008 (£525).

In spite of the recovery we have seen in other areas particularly output and employment those numbers are a stark reminder that the credit crunch era has brought ch-ch-changes. Even at the current rate of real wage growth it will be more than a couple of years before we do a Maxine Nightingale and get right back where we started from.

Employment

The Resolution Foundation have summed it up here.

it’s clear that there is no bigger change to our economy over this period than the employment boom. Over 3 million more people are in work and the working-age employment rate is around 3 percentage points higher than when we were last broadly at full employment in 2008.

They however find themselves in some theoretical quicksand highlighted by their use of “full employment” when it was a fair bit lower than now and the use of “broadly” does not cut it. They are in the same quicksand with wages as higher labour supply has apparently kept it low and yet in the past we recall being told that higher migration ( higher labour supply) did not affect wage growth.

But the picture here has been like the “Boom! Boom! Boom!” of the Black-Eyed Peas as we note that now the winds of change might be blowing.

The latest UK Labour Force Survey (LFS) estimates for Quarter 3 (July to Sept) 2019 saw employment decline by 58,000 to 32.75 million, the second rolling quarterly decrease. However, in the year to September 2019, employment increased by 323,000.

This is consistent with a slowing economy and high levels of employment. We will have to see if the numbers will ebb and flow or have now turned lower. Also the mixture has changed as recent years have been a case of let’s hear it for the girls.

The fall in employment in Quarter 3 was driven by the fall in the number of women in employment, down by 93,000 to 15.46 million. Over the same period, the number of employed men increased by 35,000 to 17.3 million.

Comment

Let me now switch to the best part of today’s report which is this.

The level of unemployment fell by 23,000 to 1.31 million in Quarter 3 2019, while the unemployment rate fell by 0.1 percentage point to 3.8%. Compared with Quarter 3 2018, the level of unemployment decreased by 72,000.

For newer readers unemployment and employment can both rise or as they have in this instance fall. It seems illogical but there is also an inactive category, but the specific move at this time of year is probably related to students.

The mixed picture we have today of slowing wage growth with employment falling will be noted at the Bank of England. Already 2 have voted for an interest-rate cut and more much of these will see that number rise. Of course the Bank of England is in quite a mess as Samuel Tombs of Pantheon inadvertently pointed out.

And at 3.8%, the u/e rate is well below the MPC’s estimate of its sustainable level, 4.25%.

So wage growth should be rising. Oh well! Also that is before we get to them thinking it was 4.5%, 5%, 5.5% and 6.5%. So they do not know what they are doing which usually in their case means another interest-rate cut is in the offing.

That would be curious as we are in a phase where bond yields generally have been backing up. The UK 5 and 2 year yields have risen in response to 0.55%, who said markets were always right? Or indeed always logical?

 

 

 

 

 

14 thoughts on “UK employment trends will worry the Bank of England

  1. Having already read a number of articles today, this is my quote of the day:

    Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

    “Admittedly, the 58K, or 0.2%, quarter-on-quarter fall in employment in Q3 was the largest drop since Q1 2013. But an increase in average hours meant that total hours worked were unchanged in Q3, indicating that labour demand is holding up better than the headline job numbers suggest.”
    He added that the data suggests that the labour market “remains very tight”, meaning wages will continue to rise at a steady rate.
    “We continue to expect year-over-year growth in wages to remain comfortably above 3% over the next year, dissuading the MPC from turning to fresh monetary stimulus.”

    Wage growth has slowed from 3.9% earlier in the year to 3.6% now that is a slowing of wage growth not a rise!

    But to stick with wages which are in real terms still lower than there pre financial peak, there is a interesting article here from the FT which gives a possible reason for the jobs boom:

    https://www.ft.com/content/758d0e36-0491-11ea-9afa-d9e2401fa7ca

    As to where average wage increases for the UK are heading, well not to put a further dampening on the outlook, this article suggests real wages are set to be lower in 2020

    http://www.mynewsdesk.com/uk/eca-international/pressreleases/uk-workers-set-to-receive-a-lower-real-salary-increase-in-2020-2942609

    What I would like to know-if real wages had have been tied to the RPI what would real wages look like now compared to the pre financial crisis of 2008 ?

    So all in all you read the articles, you read the stats and you take your pick as the fantasy economics and data out in the real world.

    There is more data out tomorrow on the inflation front and more to ponder over.

  2. My concern with the minimum and living wages is that they are normally earned by those who rent as it basically impossible to buy a house on the living wage. I worry that the extra income will be immediately feed into a rise in rents leaving those on low wages no better off. Rent control or state owned social housing at a fixed rent cost below “market rate” would do more to get more money into the hands of the lower paid.

    • Hi bootsy

      That is an old concept in a way and reminds me of someone I was thinking of yesterday. My maternal grandfather was in the Royal Artillery so I like to go to the Remembrance service in Battersea Park and pay my respects to his efforts. But returning to your point he lived in council housing starting by Tower Bridge (though he was rarely there 1940-45 for obvious reasons) and then in Dulwich next to my primary school. That concept of mass social housing has faded away hasn’t it?

  3. Great blog as usual, Shaun.
    As you wrote, using the CPIH deflator, total real wages for the period July to September 2019 showed an annual increase of 1.8%. This was unchanged from the 1.8% growth rate for June to August 2019. If one deflated by the RPI instead one gets just a 0.9% growth rate in real wages for July to September, also unchanged from the previous period, but this estimate is downward-biased because of the upward bias in RPI inflation due to the formula effect. Deflating by RPIJ, one gets a 1.5% increase in real wages for July to September, 0.3 percentage points lower than the official estimate. For June to August the increase is also 1.5%. For me, this is the best available estimate. The official 1.8% estimate is too high.
    Of course, including imputed rents in CPIH is not its only defect as a deflator for nominal wages. Like the CPI it is a macroeconomic index: its weighting includes spending by foreign tourists in the UK and prices tuition fees paid by foreign students in the UK, and there are other problems with it. Neither the CPI nor the CPIH ever should have been used as the official deflator of nominal wages. However, now the ONS plans to “reform” the RPI and hence the RPIJ by replacing its existing owner-occupied housing component with imputed rents, making the RPIJ less relevant as a deflator, and even before the RPI is withdrawn the ONS seems likely to stop publishing the formula effect difference between RPI and RPIJ, making the calculation I just did impossible in the future.
    There is a haunting passage in George Orwell’s 1984 where Winston Smith thinks that in a few years the last people who can remember a world before Big Brother’s takeover will have died off, and the question of whether life was better or worse under the old regime will be unanswerable. The UK now seems to be headed towards a situation where there will not be a single household-oriented measure of consumer price inflation published, and the question “What was the increase in real wages over the last year?” will also be unanswerable. Perhaps this is unfair, and the household cost indices will fill the void. Let’s hope so. But the roll-out has been painfully slow, and the very existence of the series seems to be inconsistent with the official view that having explicit mortgage interest costs in a consumer price series, as the HCIs do, is double-plus-ungood. So one wonders if the Government may not change its mind about the HCIs just as it did about the RPIJ.

    • Hi Andrew and thank you

      It would not surprise me as there have been at least 3 attempts to neuter the HCIs
      1. Dropping the use of house prices and mortgage costs
      2. Leaving out student loans
      3. Making it annual only ( & hence not much use)

      I wouldn’t give up on the CPIH issue. I will put more in the post tomorrow as it is inflation day but I remain determined to foil their plans to scrap the RPI and for the last 7 years it has worked. The only weakness has been their petty responses like the refusal to update it.

      Between us we could have reformed it in a year…

  4. This election coming up is unusual in that the government/treasury/Bank of England haven’t had the opportunity with the budget preceding the election to goose the economy and the housing market in advance to give the electorate the feel good factor, however once the election is out of the way, in the new year Carney will be cutting rates like a demented lumberjack and restarting NotQE.

    • The government has of course benefitted from low unemployment and wages rising faster than inflation but employment may have now peaked according to many economists.

  5. Some wag on the FT pointed out there are 1.5M fewer income tax payers than in 2007. Incredible drop really, does make you think about the kind of jobs folk in the Uk have…

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.