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UK labour market stutters, buffeted by heightened uncertainty and faltering growth

Published: 4/20/2016

In disappointing news for the UK economy, employment growth has slowed to a crawl, unemployment is rising, and headline earnings growth has fallen back sharply, although this has been heavily influenced by lower bonus payments.



IHS perspective

 

Significance

The UK labour market is now clearly being increasingly affected by mounting business caution amid heightened domestic and global economic uncertainties, as well as softer UK economic activity so far in 2016.

Implications

The very disappointing combination of a rise in unemployment and a marked fall in headline earnings growth may well fuel belief that the Bank of England's eventual next move could well be to cut interest rates. At the very least, the data will reinforce belief that any interest-rate rise is completely off the table for the time being. However, it is worth bearing in mind that Bank of England governor Mark Carney has said that due to the impact of the EU referendum, the Bank is likely to react more cautiously to UK data and economic news over the first half of 2016 than would normally be the case.

Outlook

IHS expects the labour market to continue to be pressurised in the near term as companies are more careful in their hiring decisions as business confidence and economic activity are likely to be dampened by heightened uncertainty ahead of the 23 June referendum on UK membership of the EU. On the assumption that the UK votes to stay in the EU, we expect the subsequent reduced uncertainty to boost growth and business confidence, thereby supporting renewed improvement in the labour market.

The latest data graphically indicate that the UK labour market is now being buffeted by increasing business caution and uncertainty ahead of June's referendum on UK membership of the EU, lacklustre UK economic activity so far in 2016, and the introduction of the National Living Wage in April. Global economic uncertainties are reinforcing business caution.

Employment down from record high

Employment rose by just 20,000 in the three months to February to 31.409 million. This was down markedly from increases of 116,000 in the three months to January, 205,000 in the three months to December 2015, and 267,000 in the three months to November 2015. Furthermore, employment had been slightly higher at a record 31.418 million in the three months to January. Year-on-year (y/y) employment growth slowed to 360,000 in the three months to February from 478,000 in the three months to January.

The number of people in full-time employment increased by 17,000 in the three months to February to 22.977 million and was up 289,000 y/y. The number of people working part-time edged up 3,000 in the three months to February to 8,432 million; it was up 71,000 y/y. The employment rate (among those aged 16–64) remained at 74.1% in the three months to February (the highest rate since comparable records began in 1971). It had originally 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 rises for first time since mid-2015

The number of unemployed on the Labour Force Survey (LFS)/International Labour Organization (ILO) measure rose by 21,000 in the three months to February to 1.696 million, the first increase since the three months to July 2015. This compared with declines of 28,000 in the three months to January, 60,000 in the three months to December, and 99,000 in the three months to November 2015. The number of LFS/ILO unemployed had been at 1.675 million in the three months to November 2015 (the lowest level since mid-2008). Consequently, the LFS/ILO unemployment rate remained at 5.1% in the three months February, 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 had 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 rose by 21,000 in the three months to February while employment increased by 20,000 reflects the fact that the labour force grew by 41,000.

Finally, the number of claimant-count jobless (including those receiving Universal Credit) rose by 6,700 in March to 732,100 from a record low of 725,400 in February. This compared with declines of 9,300 in February and 28,400 in January. The claimant-count unemployment rate remained at 2.1% in March, after first falling to this level in January from 2.2% in December and 2.3% in November 2015.

Regular earnings growth stable in February, but total pay growth slows sharply

Regular annual earnings growth (which excludes bonus payments) was stable at 2.3% in February, up from 2.1% in December and a nine-month low of 1.6% in October 2015. Nevertheless, it was still markedly below the July 2015 peak level of 2.9% (the highest level since December 2008). It had been as low as 0.5% in April 2014. Underlying annual average earnings growth therefore remained at 2.2% in the three months to February, having risen to this level 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 rose to 2.6% in February itself from 2.5% in January, 2.4% in December, and 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 dipped to 1.4% in February after rising to 1.7% in January from 1.2% 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 reflected the government's moves to limit public-sector pay as part of its austerity measures.

UK labour market (thousands)

 

Mar 2016

Feb 2016

Jan 2016

2014

2015

ILO unemployment (level)

n/a

1,696.0

1,685.0

2,027.0

1,780.0

ILO unemployment rate

n/a

5.1

5.1

6.2

5.4

Claimant-count unemployment (level)

732.1

725.4

734.7

1,037.1

794.1

Claimant-count unemployment rate

2.1

2.1

2.1

3.0

2.3

Employment (level)

n/a

31,409.0

31,418.0

30,726.9

31,180.9

Headline weekly annual average earnings growth

n/a

1.1

2.6

2.5

1.9

Underlying weekly annual average earnings growth (excl. bonuses)

n/a

2.3

2.3

2.4

2.3

Source: Office for National Statistics

Meanwhile, total annual earnings growth (which includes bonuses) fell back sharply to a 16-month low of 1.1% in February after rising to 2.6% in January from 1.6% in December 2015. This series has been affected markedly by fluctuations in bonus payments, with February's drop attributed largely to lower bonuses in the financial and business services sector. Growth had been as high as 3.6% in July 2015. Consequently, annual headline earnings growth was limited to 1.8% in the three months to February, the lowest rate since the three months to February 2015. It was down from 2.1% in the three months to January and a peak of 3.0% in the three months to both September and August 2015.

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 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 MPC 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 in some sectors, and the National Living Wage kicking in at the start of April, IHS thinks it is likely that earnings growth will gradually pick up over the coming months. However, 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 essentially halved from the peak level seen around September 2015, although it is still relatively decent. At 1.8% in the three months to February (the benchmark measure usually used), annual average earnings growth was 1.5 percentage points above consumer price inflation of 0.3% in February (and inflation rose to 0.5% in March). 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.

Outlook and implications

IHS expects the labour market to remain pressurised in the near term as economic activity and business confidence are dampened by heightened uncertainty ahead of the 23 June referendum on UK membership of the EU. On the assumption that the UK votes to stay in the EU in June, we expect the subsequent reduced uncertainty to boost growth and business confidence, thereby supporting renewed improvement in the labour market.

Nevertheless, employment growth is likely to be 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 seeing 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 for workers aged over 25) increase the incentive for companies to get more out of their workers and also encourage companies to 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 obtain the skilled and experienced workers they need. The March Bank of England agents' survey reported that "recruitment difficulties had remained above normal", although there had been some easing of the problem. On balance, we see the unemployment rate coming down to 4.8% by end-2016 and to a low of 4.6% in 2017.

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