UK Employment Gains Unlikely to Trigger Rate Rise

Bank of England
Bank of England

At first glance, the latest jobs figures look curious. The economy is creating plenty of jobs. Unemployment is falling. The proportion of people in work has never been higher. These are precisely the conditions in which to expect upward pressure on wages.

But pay inflation remains the dog that doesn’t bark. Excluding bonuses, regular earnings in the three months to September were 2.5% higher than in the same three months of 2014. This is down from the 2.8% recorded in the quarter that ended in August.

In September alone, regular pay was 1.9% higher than a year earlier, compared with a 2.6% increase in the year to August. Average weekly earnings excluding bonuses stood at £463 in September, an increase of just £3 a week since March.

In truth, the continued weakness of earnings should come as little surprise. There are a number of factors that taken together explain why wages are not growing as rapidly as might have been expected, given the fall in the jobless total.

The first is that the low level of inflation has created an environment in which employers offer only modest increases in the annual pay round. Put simply, if inflation was running at 2%, employers would be offering 4% to attract and retain staff. But after months in which the cost of living has remained broadly unchanged, employers are offering 2% instead.

The second is that the supply of labour is expanding due to inward migration. According to the Office for National Statistics data, there was an increase of 430,000 in the number of people employed in the past year. Of those, 327,000 came from outside the UK.

A further breakdown shows that of those 327,000, the vast majority – 291,000 – came from the EU, and of those 140,000 were from the 14 countries that were members before 2004, 132,000 were from the countries following the EU’s expansion into the former communist countries of eastern Europe, and 30,000 came from Romania and Bulgaria. Increasing the supply of labour, especially from countries where earnings are lower than in the UK, will depress wage growth.

Finally, there is evidence that demand for labour has weakened. There was an impressive-looking increase in net employment of 177,000 between the three months ending in June and the three months ending in September, but of that jump only 31,000 was the result of full-time jobs. The rest were part-time.

In short, there is nothing in these figures that should cause the Bank of England to bring forward an increase in interest rates, even if the Federal Reserve raises the cost of borrowing in the US next month.