UK labour market resilient in April as earnings growth increases

The UK labour market is proving pretty resilient given the strong headwinds it is facing, namely muted UK growth so far in 2016, heightened domestic and global economic uncertainties magnified by the EU membership referendum, and the introduction of the National Living Wage in April. Nevertheless, job creation has slowed compared with the start of the year and much of 2015.

Employment rises to record high

Employment rose by 55,000 in the three months to April to a new record high of 31.594 million. Although up from an increase of 44,000 in the three months to March, this was down markedly from increases of 116,000 in the three months to January 2016, 205,000 in the three months to December 2015, and 267,000 in the three months to November 2015. Year-on-year (y/y) employment was up 461,000 in the three months to April. The number of people in full-time employment increased by 63,000 in the three months to April to 23.096 million and was up 304,000 y/y. The number of people working part-time edged down by 8,000 in the three months to April to 8,498 million; it was up 157,000 y/y.

The employment rate (among those aged 16–64) remained at 74.2% in the three months to April (the highest rate since comparable records began in 1971) after rising to this level in the three months to March from 74.1% in the three months to February. It is up from a low of 72.2% in the three months to September 2011.

Unemployment falls modestly

The number of unemployed on the Labour Force Survey (LFS)/International Labour Organization (ILO) measure dipped by 20,000 in the three months to April to 1.671 million. This was the lowest level since the second quarter of 2008. It had actually risen back up to 1.700 million in the three months to February from a previous low of 1.685 million in the three months to November 2015.

Consequently, the LFS/ILO unemployment rate dipped to 5.0% in the three months to April, the lowest rate since the fourth quarter of 2005. It had previously been stuck at 5.1% since the three months to November 2015. This was down 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 LFS/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 20,000 in the three months to February while employment increased by 55,000 reflects the fact that the labour force grew by 35,000.

Finally, the number of claimant-count jobless (including those receiving Universal Credit) edged down by 400 in May to 746,100. However, this followed a markedly upwardly revised increase of 6,400 in April (previously reported as a drop of 2,400). Consequently, at 746,100 in May, claimant-count unemployment was 20,700 above the record low of 725,400 seen in February. The claimant-count unemployment rate was stable at 2.2% in May, up from a low of 2.1% in February and January.

Total and regular earnings growth up in April

Annual average weekly regular earnings growth (which excludes bonus payments) pleasingly rose to 2.5% in April after dipping to a five-month low of 1.9% in March from 2.3% in both February and January. This is still below the peak level of 2.9% seen in July 2015. Regular earnings growth was therefore 2.3% in the three months to April, up from 2.2% in the three months to March but still down from a peak of 2.9% in the three months to July 2015.

Annual average weekly regular earnings growth in the private sector rose to an eight-month high of 2.7% in April after relapsing to 2.0% in March from 2.5% in both February and January. This was still down from 3.4% in July 2015 (the best rate since October 2008). Annual average weekly regular earnings growth in the public sector improved to 2.0% in April from 1.6% in March and 1.4% in February. With the exception of November 2015, it had been in a range of 0.7–1.4% throughout 2015. This reflected the government's move to limit public-sector pay as part of its austerity measures.

Meanwhile, total annual average weekly earnings growth (which includes bonuses) also improved to 2.5% in April itself, which was up from 2.0% in March and a 13-month low of just 1.3% in February. It had previously dipped to February's low from 2.7% in January – although this was affected by the timing of bonus payments during the first quarter. It is down from a peak of 3.6% in July 2015. Total annual earnings growth was still limited to 2.0% in the three months to April, which was the same as in the three months to March and down markedly from 3.0% in the three months to September 2015. Total annual average weekly earnings growth at 2.0% in the three months to April was well below the level (at least 3.0%) that the Bank of England believes is consistently needed to get consumer price inflation up towards its 2.0% target level. However, the Bank will be pleased to see the increase to 2.5% in April itself.

It appears that prolonged negligible inflation has been a significant factor in limiting pay awards, despite the fact that a tighter labour market had been expected to exert upward pressure on pay. The Bank of England's regional agents have frequently referred to this factor in their monthly reports on business conditions. Additionally, the Bank's Monetary Policy Committee considered it possible in the minutes of its February meeting that "the boost to real incomes from the fall in energy prices may have made lower nominal wages more acceptable". It is also considered possible that annual earnings growth has been limited by a change in the mix of employment growth towards more lower-paid jobs.

With the labour market relatively tight, recruitment difficulties apparent in some sectors, and the introduction of the National Living Wage at the start of April, IHS thinks it is likely that earnings growth will pick up further gradually over the coming months.

The positive gap between earnings growth and consumer price inflation has narrowed appreciably from the peak level seen around September 2015, although it is still relatively decent. At 2.0% in the three months to April (the benchmark measure usually used), annual average earnings growth was 1.7 percentage points above consumer price inflation of 0.3% in April and May. In contrast, annual average earnings growth had been 3.0% in the three months to September 2015, when it was 3.1 percentage points above deflation of 0.1% that month. The three-month measure of annual earnings growth is normally used, given that the monthly patterns can be erratic.

Outlook and implications

On the increasingly questionable assumption that the UK votes to remain in the EU, IHS expects the subsequent reduced uncertainty to boost growth and business confidence, thereby supporting the labour market and allowing the unemployment rate to edge down further to 4.9% by end-2016 and then to 4.7% by end-2017.

Nevertheless, 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. Admittedly, labour productivity has been very weak for a long time and relapsed markedly in the fourth quarter of 2015 after finally recording significant improvement in the second and third quarters, but we believe it will improve as a tightening labour market and April's introduction of the National Living Wage (set at GBP7.20 or USD10.20 for workers aged over 25) increase the incentive for companies to get more out of their workers and to also invest in plant and processes to save labour. Indeed, the Bank of England's regional agents' March 2016 survey of business conditions reported, "Employment growth intentions had eased over the quarter, reflecting a continued focus on raising productivity, heightened uncertainty, and a softening of demand growth."

Additionally, survey evidence suggests that the National Living Wage is making some companies more cautious over employment. In some sectors, companies are finding it hard to acquire the skilled and experienced workers they need. The May Bank of England's agents' survey reported that recruitment difficulties "remained above normal", although there has been some easing of the problem. Meanwhile, cuts to welfare benefits are putting increased pressure on people to work.

Should the 23 June referendum result in a vote for the UK to leave the EU, IHS suspects that markedly weaker UK economic activity and weakened business confidence amid heightened uncertainty and concerns would take an appreciable toll on the labour market and see unemployment move significantly higher.