UK employment – “The omens for the UK labour market are not great”

Are wages ‘yesterday’s battle’ for the BoE? by Rob Morgan

The omens for the UK labour market are not great. Having held steady at 4.4% for several months, the unemployment rate ticked up in the three months to March to 4.5%, and then to 4.6% for April. Meanwhile, the number of vacancies continues to fall away. It’s a signal for households to take a more cautious view of the employment market and build some cash for leaner times if possible.

These cracks previously stood in contrast to average wages, which remained buoyant. However, there are now signs that pay is rolling over too. April’s figure shows a significant easing to 5.2% from 5.5% a month earlier, which makes it a little more likely the Bank of England will gain the confidence to cut interest rates again in the coming months.

A divided MPC

The BoE has been in a dilemma for some time about whether it places more emphasis on deteriorating labour market trends and the lacklustre growth picture, or on the potentially engrained wage rises that stood to stoke the inflationary embers.

The Bank’s chief economist Huw Pill, who voted for a hold rather than a cut to interest rates in May, has voiced concerns about the latter. But several other members of the MPC worried more that the economy could slow quickly in the second half of next year, and that wage rises will drop away with it. No point, they believe, in fighting yesterday’s battle.

April’s jobs data offers some ammunition for the camp looking to cut earlier. Household spending firepower, taken in the round, continues to be bolstered by wage growth, which at over 5% is still at odds with the BoE’s 2% inflation target. However, there is now clear evidence of a slowdown in pay awards, which combined with other employment trends weakening further, could tilt the balance towards easing.

What impact has the increase in employer NI had?

April’s data should reflect the fuller effects of the increases in minimum wages and employer national insurance costs, which could have helped keep pay higher at the same time the labour market is cooling.

As well as directly lifting lower earners’ pay, there is a potential ratchet effect whereby more senior staff expect to maintain a pay differential over lower ranking workers. Overall, this could mean employers paying more to staff retained but being hesitant to hire or replace, which results in lower overall headcount. We could therefore see a continuation of quite sticky wages while unemployment continues to rise, though the effect should wear off relatively quickly.

Rob Morgan is Chief Investment Analyst at Charles Stanley