United Kingdom: Unemployment rate dips to fresh multi-decade low in May, but real wage growth remains negative
July 12, 2017
Jobless claims rose by 6,000 in June, according to the Office for National Statistics (ONS), contrasting the revised 7,500 increase observed in the previous month (previously reported: 7,200 increase) and coming in below analysts’ expectations.
The unemployment rate—derived from a different survey—fell once more to 4.5% in May (the latest period for which data is available), beating market expectations of 4.6% and marking the lowest rate since 1975. The UK labor market remains highly robust despite heightened political uncertainty in the UK and the recent slowdown in the domestic economy. Encouragingly, the number of people who are economically inactive is also at the lowest rate since comparable records began in the 1971, meaning the fall in the unemployment rate isn’t simply a sign of workers abandoning the jobs market.
However, despite a record-low unemployment, this has yet to translate into higher wages. In the March-May period, total pay fell by 0.7% in real terms compared to the same period of the previous year, the worst reading since June to August 2014. As a result, average total pay in May remained below the pre-crisis peak it reached over nine years ago. This is in stark contrast to the performance of GDP, which surpassed its pre-crisis peak several years ago. Several factors could be at play; firms may be reluctant to raise wages while economic uncertainty is so pervasive, or could be attempting to counter the impact of a weaker sterling on margins, and a cap on pay rises of 1.0% in the public sector isn’t helping matters. A more fundamental reason is probably poor labor productivity growth, which remains significantly below pre-crisis levels.
With inflation continuing to rise in May, the squeeze on real wages is only likely to intensify in the coming months. However, the unemployment rate has now reached the equilibrium rate, as estimated in the Bank of England’s May Inflation Report, meaning further falls could start to see wage pressures creep up further down the line.
Author: Oliver Reynolds, Economist