UK labour market shows signs of slowdown as underlying earnings growth only edges up

The latest data show ongoing improvement in the UK labour market, but beneath the surface there are signs that employment growth is slowing as the economy finds expansion harder to come by and the outlook seems more uncertain amid global and domestic uncertainties (notably the looming 23 June referendum on UK membership of the European Union). Meanwhile, underlying earnings growth remained muted in January, which is likely to solidify belief that the Bank of England will not lift interest rates for some considerable time to come, and most likely not in 2016.

Employment up to new record high

Employment rose by 116,000 in the three months to January to a record high of 31.418 million. However, this was down from increases of 205,000 in the three months to December and 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 478,000 year on year (y/y) in the three months to January.

The number of people in full-time employment increased by 62,000 in the three months to January to 22.942 million and was up by 302,000 y/y. Additionally, the number of people working part-time rose by 54,000 in the three months to January to a record 8.476 million; it was up 177,000 y/y. The employment rate (among those aged 16–64) remained at 74.1% in the three months to January (the highest rate since comparable records began in 1971). It had risen to this level in the three months to December 2015 from 73.9% in the three months to October 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 28,000 in the three months to January to 1.685 million. However, this was down from drops of 60,000 in the three months to December and 99,000 in the three months to November 2015, when the number of unemployed was actually 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 January, 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 2015 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 18,000 in February to a new record low of 716,700. This followed declines of 28,400 in January 2016 and 16,800 in December 2015. The claimant-count unemployment rate remained at 2.1% in February, having dipped to this level in January from 2.2% in December and 2.3% in November 2015.

Underlying earnings growth edges up in January

Underlying annual earnings growth (which excludes bonus payments) edged up in January but remained well below the peak level seen in July 2015. Specifically, annual regular earnings growth rose to 2.2% in January after dipping to 2.1% in December from 2.2% in November 2015. Although this was up from a nine-month low of 1.6% in October, it was still markedly below the 2015 peak level of 2.9% in July (the highest level since December 2008). It had been as low as 0.5% in April 2014. Underlying annual average earnings growth therefore edged up to 2.2% in the three months to January from 2.0% in the three months to December and 1.9% in the three months to November 2015. It had previously relapsed to the November low 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 January itself after rising to this level in November from 1.8% in October 2015. This is down from 3.4% last July (the best rate since October 2008). Underlying earnings growth in the public sector moved back up to 1.6% in January after dipping to 1.1% in December from 1.6% in November 2015. With the exception of November, it was in a range of 0.7–1.4% throughout 2015. This has reflected the government's moves to limit public-sector pay as part of its austerity measures.

Meanwhile, total annual earnings (which include bonuses) growth rose to a five-month high of 2.5% in January after dipping to a 10-month low of 1.5% in December from 2.2% in November 2015. However, the January/December fluctuations were reportedly influenced significantly by the timing of bonuses in the financial sector. Total annual average earnings growth remains notably below the 3.6% rate seen in July 2015. Annual headline earnings growth rose modestly to 2.1% in the three months to January after moderating to 1.9% in the three months to December (the lowest level since the three months to February 2015) from 2.1% in the three months to November and 3.0% in the three months to September 2015.

Although the modest uptick in underlying earnings growth from the low seen in October 2015 suggests that the weakness in earnings growth has bottomed out, it remains sluggish. The Bank of England is paying much attention to the softer earnings growth compared with the peak level seen in 2015, and it is a major factor why the Monetary Policy Committee (MPC) believes 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 in 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". Additionally, the MPC considered it possible in the minutes of their February meeting that "the boost to real incomes from the fall in energy prices may have made lower nominal wages more acceptable". 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.

Given that the labour market is relatively tight, there are recruitment difficulties in some sectors, and the National Living Wage is set to take effect shortly, IHS thinks it is entirely possible that earnings growth will slowly 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 2.1% in the three months to January (the usual benchmark used), annual average earnings growth was 1.8 percentage points above consumer price inflation of 0.3% in January. In contrast, annual average earnings growth had been 3.0% in the three months to August 2015, 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 rate 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 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, which was likely to have been influenced by strengthening earnings growth. Admittedly, there appears to have been a relapse in productivity in the fourth quarter of 2015 (when earnings growth also relapsed) but a tightening labour market and the forthcoming introduction of the National Living Wage from April (set at GBP7.20 or USD10.15 for workers aged over 25) increase the incentive for employers to get more out of their workers, while also increasing 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 are also survey evidence and reports that indicate that some companies are scaling back employment plans owing to the introduction of the National Living Wage.

In some sectors, companies are finding it hard to acquire the skilled and experienced workers they need. The February Bank of England agents' survey reported that "recruitment difficulties had remained above normal", although there had been some easing of the problem. Meanwhile, cuts to welfare benefits are putting increased pressure on people to work.