United Kingdom Unemployment June 2017

United Kingdom

United Kingdom: Unemployment rate drops to yet another multi-decade low in June, but real wage growth remains negative

August 16, 2017

Jobless claims fell by 4,200 in July, according to the Office for National Statistics (ONS), contrasting the revised 3,400 increase observed in the previous month (previously reported: 6,000 increase) and contrasting analysts’ expectations of a rise in the claimant count.

The unemployment rate—derived from a different survey—fell once more to 4.4% in June (the latest period for which data is available), beating market expectations of 4.5% and marking the lowest rate since 1975. The UK labor market remains highly robust despite heightened political uncertainty in the UK and the slowdown in the domestic economy which was confirmed by the recently published sluggish Q2 GDP figure. The unemployment rate is now marginally below the Bank of England’s estimate for the natural rate of unemployment, at 4.5%. 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 an increasingly tight labor market, this has yet to translate into higher earnings, as elevated inflation has eaten away at consumers’ purchasing power. In the April-June period, total pay fell by 0.5% in real terms, up slightly from the 0.7% fall observed in March-May period, which had marked the worst reading since August 2014. As a result, average total pay in June 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.

Over the next few months real wage growth will likely remain negative. Although inflation in both June and July came in below analysts’ expectations at 2.6%, our panelists still forecast inflation to rise towards the end of the year, intensifying the squeeze on pay. Looking further ahead, tightness in the labor market should see growth in earnings pick up, although it will likely remain subdued by historical standards due to sluggish productivity improvements.

Our panelists are currently taking the latest economic developments into account, with a new FocusEconomics Consensus Forecast to be published on 29 August.

Author:, Economist

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United Kingdom Unemployment Chart

UnitedKingdom Unemployment July 2017

Note: Three-month average of unemployment rate in %.
Source: Office for National Statistics (ONS).

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