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?