Unemployment numbers up and wage growth down: Why the UK labour market has started to stutter

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Jobs and wages figures released today raised questions over whether the UK economy could be losing steam.

Analysts were quick to point to a host of factors that could be at play, as well as what the numbers mean for everything from interest rates to Brexit.

The figures

The headline unemployment rate came in unchanged at 5.1 per cent, while the employment rate stayed at its highest ever level on record – 74.1 per cent.

However, the top-line figures betrayed some slightly less rosy details hidden beneath:

  • The number of people out of work jumped by 21,000, the first monthly increase since May 2015

  • Vacancies slipped by 0.1 per cent – the first fall in hiring intentions since June 2015

  • Wage growth was running at 1.8 per cent, it slowest rate since January last year, with average weekly earnings of £491 their lowest since June

Why the slowdown?

Brexit

With two months to go until the EU referendum, no economic analysis is complete without an obligatory mention of the impact the vote is having on any number of indicators. In terms of the labour market, the narrative goes that firms are reluctant to hire staff ahead of 23 June as they are trying to minimise the number of long-term decisions they have to make before any potential disruption.

The latest data graphically indicate that the labour market is now being buffeted by increasing business caution and uncertainty ahead of June’s referendum on UK membership of the EU 

– Howard Archer, IHS Global

These latest data are consistent with other evidence that UK growth slowed somewhat during the first quarter of 2016, reflecting a more fragile global economy and uncertainty related to the EU Referendum outcome in June 

– John Hawksworth, chief economist, PwC

This slowdown in employment growth and rise in unemployment might suggest that Brexit uncertainty is starting to weigh on hiring

– Scott Bowman at Capital Economics

The CBI agreed. “With more uncertainty in the economy it’s not surprising that labour market performance shows signs of levelling off,” said Neil Carberry, director of employment and skills at the employers’ body.

The national living wage

The government’s national living wage, which acts as a minimum wage hike for employees over the age of 25, came into force this month. These figures refer to the three months to February – but economists suggested that the looming introduction could have affected businesses’ plans for hiring and pay ever since it was announced.

Firms may have been adjusting their workforce in preparation for the National Living Wage which came into effect in April

– Capital Economics 

The introduction of the National Living Wage has raised pay for many low earners

– James Sproule, chief economist, Institute of Directors.

Employers are having to take on increased costs associated with a range of new policies on wages and skills, which may have delayed growth plans

 – CBI

I suspect the National Living Wage has been gradually feeding into the earnings data in the past few months, but there may well still be a noticeable impact in the April figures

– Howard Archer, IHS

The skills shortage

Despite the slowdown in the number of firms advertising vacancies, the jobseekers-to-jobs ratio, at 2.2, is still at a record low. In theory, that means the balance has been tipped towards people moving jobs who should be able to demand higher wages.

Instead, what might be happening is that the vacancies we have now cannot be filled, meaning employment grows at a much slower rate and wages fail to budge.

That’s what the British Chambers of Commerce think might be happening. Acting director general, Adam Marshall, said: “Businesses are facing a growing skills shortage that poses a genuine threat to future productivity and growth.”

Read more: How to solve the productivity puzzle?

A clue to why wages aren’t picking up, as the textbook would suggest, could emerge from a closer look at what is happening at a sectoral level.

James Sproule of the Institute of Directors points out that “much of the increase in employment in 2015 came in areas like accommodation and food services”. These are typically lower paid roles “which add little to the productivity statistics”.

Construction workers, by contrast, have felt their pay bounce up at a very healthy rate over the past 12 months. Average weekly wages stand at £605 – more than one-fifth above the national average and eight per cent higher than a year ago.

Because the good times just can’t last

Those are a few of the glass half-empty arguments knocking about. Others take a more optimistic outlook.

After all, the employment rate is at its highest ever level and unemployment – at 5.1 per cent – is still comfortably at a pre-crisis low. Moreover, the UK compares extremely favourably to some of its European counterparts.

Considering that the beginning of 2016 was the worst start to a year in markets since 2008 and EU referendum uncertainty is looming over the UK, today’s data is somewhat encouraging. So far, despite serious risks, the labour market is holding up

– Kallum Pickering, senior UK economist, Berenberg

The UK economy continues to power ahead, with the rise in employment and unemployment showing that employment is buoyant enough to attract the long-term inactive back into the job market. Getting people who have fallen out of the labour market looking for work again, combined with migrants bringing their skills here, is a key part of the UK’s continued economic expansion 

– Institute of Directors

Where next?

The Bank of England and Office for Budget Responsibility (OBR) both expect wage growth to pick up over the rest of the year. The Bank's February Inflation report suggested wage growth would run at around 3.25 per cent by mid-2016. That would be a near-doubling from today.

The OBR is even more optimistic. It expects wages to grow by 3.6 per cent over the course of this year.

The British Chambers of Commerce, however, is predicting just 2.6 per cent.

Both the OBR and the Bank believe that the headline unemployment rate won't dip much below five per cent. However, nearly all the forecasts that are kicking about assume the UK votes to stay in the European Union – what would happen to jobs and wages in the immediate aftermath of a vote to leave, is a little less clear.