UK earnings growth moderates as employment reaches new record high

The latest data show overall healthy improvement in the UK labour market, although there are some hints that employment growth could be starting to slow as the UK economy finds growth harder to come by and as the outlook seems more uncertain amid global and domestic uncertainties (notably the looming referendum on UK membership of the European Union). Meanwhile, earnings growth moderated in December 2015, which is likely to solidify belief that the Bank of England will not raise interest rates in 2016.

Employment up to new record high

Employment rose by 205,000 in the three months to December 2015 to a record high of 31.417 million. However, this was down from an increase of 267,000 in the three months to November 2015 (which had been the third largest rise in employment since records began in 1971). Employment was up by 521,000 year on year (y/y) in the three months to December. The number of people in full-time employment increased by 188,000 in the three months to December to 22.984 million and was up 387,000 y/y. Additionally, the number of people working part-time rose by 17,000 in the three months to December to a record 8.433 million; it was up by 134,000 y/y.

The employment rate (among those aged 16–64) climbed to 74.1% in the three months to December, the highest rate since comparable records began in 1971. This was up from 73.7% in the three months to November 2015 and a low of just 72.2% in the three months to September 2011.

Unemployment down at reduced rate

The number of unemployed on the Labour Force Survey (LFS)/International Labour Organization (ILO) measure fell by 60,000 in the three months to December 2015 to 1.690 million. However, this was down from a drop of 99,000 in the three months to November 2015, when the number of unemployed had actually been slightly lower at 1.675 million (the lowest level since mid-2008). Consequently, the LFS/ILO unemployment rate remained at 5.1% in the three months to December, the lowest rate since the first quarter of 2006. It originally came down to 5.1% in the three months to November 2015 from 5.2% in the three months to October, 5.3% in the three months to September, and 5.6% in the three months to June 2015. The unemployment rate stood at 5.7% at end-2014 and a 16-year high of 8.4% in the final quarter of 2011.

The ILO count includes those out of work and not drawing unemployment benefits and is the primary measure by which international comparisons are drawn. The fact that ILO unemployment fell by 60,000 in the three months to December while employment increased by 205,000 reflects the fact that the labour force increased by 145,000.

Meanwhile, the number of claimant-count jobless fell by 14,800 in January to a new record low of 760,200. This followed a decline of 15,200 in December 2015, which had been up from a drop of 2,200 in November 2015. There had been small increases in October (200), September (500), and August (1,200) 2015, which were the result of the number of people receiving universal credit rising at a faster rate than the fall in the number of people receiving Jobseeker's Allowance. The claimant-count unemployment rate dropped to 2.2% in January, having stood at 2.3% between March and December 2015. This is down from 4.4% in mid-2013.

Earnings growth down in December 2015

Underlying annual earnings growth (which excludes bonus payments) dipped anew in December 2015 after a modest rise in November, to be well below the peak level seen in July 2015. Specifically, annual regular earnings growth slipped to 2.1% in January after rising to 2.2% in November from a nine-month low of 1.6% in October 2015. It had previously relapsed to October's low from 1.9% in September and 2.9% in July 2015 (the highest level since December 2008). It had been as low as 0.5% in April 2014. Underlying annual average earnings growth was therefore limited to 2.0% in the three months to December; although up marginally from 1.9% in the three months to November, this was down appreciably from 2.9% in the three months to July 2015, which had been the best performance since the three months to February 2009.

Underlying earnings growth in the private sector was stable at 2.4% in December itself after rising to this level in November from 1.8% in October 2015. This was down from 3.4% in July 2015 (the best rate since October 2008). Underlying earnings growth in the public sector fell back to 1.1% in December after spiking to 1.6% in November (which had been the highest level since January 2013). With the exception of November, it was in a range of 0.7–1.4% throughout 2015. This reflected the government's decision to limit public-sector pay as part of its austerity measures.

Meanwhile, total annual earnings growth fell back to a 10-month low of 1.5% in December itself as it was held back by lower bonus payments as well as moderate underlying earnings growth. Apart from a rise to 2.2% in November from 1.9% in October, it has trended down from 3.6% in July 2015. It had been as high as 4.4% in March 2015 and as low as 1.1% in February 2015. These swings have been heavily influenced by the timing of bonus payments, as well as their levels. Annual headline earnings growth dipped to 1.9% in the three months to December from 2.0% in the three months to November and 3.0% in the three months to September 2015. This took it down to its lowest level since the three months to February 2015.

The Bank of England is paying much attention to the recent softer earnings growth data after the marked improvement earlier on in 2015, and it is a major reason why the Monetary Policy Committee (MPC) believes that now is not the right time for an interest-rate rise. Indeed, the MPC believes that a sustained, appreciable pick-up in earnings growth is key to consumer price inflation getting back up towards its 2.0% target rate. It appears that prolonged negligible inflation is a significant factor limiting pay awards, despite the fact that a tighter labour market had been expected to exert upward pressure on pay. It is notable that in their January report of business conditions, the Bank of England's regional agents stated that low inflation had "allowed some businesses to offer lower awards than a year earlier". Other factors holding down earnings growth may well include either flat or lower hours being worked per week over the past year and a change in the mix of employment growth towards more lower-paid jobs.

With the labour market relatively tight, and given the recruitment difficulties in some sectors and the imminent introduction of the National Living Wage, IHS thinks it is entirely possible that earnings growth will pick up over the coming months, but the pick-up does now look likely to be gradual in the near term at least. The positive gap between earnings growth and consumer price inflation has diminished appreciably recently, thereby diluting consumers' purchasing power even though it is still relatively decent. At 1.9% in the three months to December 2015 (the usual benchmark used), annual average earnings growth was 1.6 percentage point above consumer price inflation of 0.3% in January. In contrast, annual average earnings growth was 3.0% in the three months to August 2015, when it was 3.0 percentage points above consumer price inflation of 0.0% that month.

Outlook and implications

IHS expects unemployment to trend downwards at a reduced pace over the coming months, taking the jobless rate down to 4.8% by end-2016 and to a low of 4.6% in 2017. Slower economic growth (particularly in 2016) compared with the peak levels seen in 2014 is likely to lead to lead to moderating demand for labour. Furthermore, employment growth is likely to be increasingly limited by improving labour productivity as many companies look to make greater use of the workers they already have. Although labour productivity was very weak for a prolonged period following the 2008/09 downturn, there was clear improvement in both the second and third quarters of 2015, and the strengthening of earnings growth earlier on in 2015 increased the incentive for companies to get more out of their workers.

A tightening labour market, as well as the forthcoming introduction of the National Living Wage – set at GBP7.20 (USD10.30) for workers aged over 25 – from April 2016, has also increased companies' incentive to invest in plant and processes to save labour. Indeed, the Bank of England's regional agents' February 2016 survey of business conditions reported that "employment growth intentions had softened overall, as companies sought to increase productivity growth". There is also survey evidence and reports indicating that some companies are scaling back employment plans owing to the forthcoming introduction of the National Living Wage.

In some sectors, companies are finding it hard to obtain the skilled and experienced workers they need. The Bank of England agents' February survey reported that "recruitment difficulties had remained above normal", although there had been some easing of the problem. The fall in unemployment could also be limited by a further rise in the number of older people continuing to work. Meanwhile, cuts to welfare benefits are putting increased pressure on people to work.