In line with our risk management framework, today we published our Q4 2019 performance update.
British unemployment rate: Shouldn’t we be celebrating?
These days, it feels like there are only three certainties in life. Death. Taxes. And falling unemployment in the UK.
Despite mixed economic performance and the rise of automation, the labour market has continued to confound economists over the last few years.
This week, the Office for National Statistics (ONS) confirmed that the inexorable decline of the unemployment rate has reached new record lows of 4.0 per cent. Concurrently, we’ve seen employment levels grow quarter-on-quarter to the tune of 42,000 jobs, making for a total employment rate of around 76 per cent, with nearly 33 million people in work.
These are numbers not seen since records began in the early 1970s, and the Bank of England has stated its belief that this puts the UK close to full employment. With much of Europe having endured ongoing problems with job creation over the past decade, it is ostensibly a good news story at the very least – or perhaps even an economic miracle, for the more enthusiastic.
So why is it not widely celebrated, or even acknowledged, as you might expect?
Scepticism and underemployment
There are those who question the definition of being ‘in work’. With the rise of the so-called gig economy, and controversial zero-hour contracts, many economists believe that blanket metrics for overall employment flatter to deceive. Data shows that the number of contracts without a minimum number of working hours rose by 100,000 in 2017 to reach 1.8 million. The latter figure has more than doubled since the 2008 financial crisis too.
It is off the back of such trends that the term ‘underemployment’ (those working part-time who are seeking more hours) has begun to be thrown around with increasing abandon, and a recent collaborative study between the ONS and Citi Research found that the number of underemployed has risen by more than 50 per cent since 2008.
On this basis, ex-Monetary Policy Committee member David Blanchflower believes that there is still considerable slack in the labour market, and an unemployment rate of roughly 3 per cent would represent a UK economy at full employment; or the point at which he expects wages to grow at a sustained pace.
Poor wage growth performance
If true, it would help to explain why wage growth has not replicated employment growth. Average earnings growth (including bonuses) tracked at 2.4 per cent for July, and therefore 0.1 per cent below expected inflation for the month. It continues one of the worst periods of real wage growth in British history - despite a steadily-falling unemployment rate since 2012. This runs counter to economic theory, which states that reduced unemployment should mean greater collective bargaining power for workers, and sustained, real-terms pay rises as a result.
Interestingly, this conundrum is not entirely unique to the UK. Both the United States and Germany have seen unemployment rates plummet over the past six years. In the case of the US, the present jobless rate of 3.9 per cent is its lowest since 2000, while Germany’s equivalent figure of 3.5 per cent is their lowest since reunification. And yet, in both countries, wage growth – and consequently, inflation – have been comparatively disappointing.
It’s led to a growing consensus that one of the pillars of economics, the Phillips curve (which graphs the inverse relationship between unemployment and inflation), has flattened out for these countries, and that demand-pull inflation is slower to respond to increased robustness in the jobs market than previously thought.
In the case of the UK, Blanchflower adds two further supporting arguments. On one hand, he believes the perception that job security has become more precarious since 2008 has “frightened” employees from asking for a pay increase. And secondly, he flags Britain’s stubbornly-persistent productivity slump over the past decade as another curb on wages. To give this some context, UK productivity growth from 1997 to 2008 averaged about 2 per cent per year, whereas it has all but levelled off since. Although there are numerous theories as to what lies behind this, a surge in low-paid jobs is commonly thought to be the chief culprit.
Reasons for cheer
When assessing economic data, perception and interpretation of figures can lead different people to draw very different conclusions. And it is with this in mind that we choose to take a more balanced, if not optimistic view. The market for labour may well be imperfect, but the fact that job opportunities continue to be created at such pace is remarkable in the current global economic climate. Indeed, there are presently 829,000 unfilled vacancies in this country (up 51,000 from this time last year), so there is no shortage of opportunities out there.
Added to that, Britain continues to cement its place as a global leader with respect to entrepreneurship, financial technology and AI – all of which are set to ramp up both productivity and wages in the future.
Care should also be taken in assessing part-time work, and in particular the gig economy. While it is vital that fair protections and benefits should be in place, surveys have shown that many of those in flexible work are content with their current arrangement. As long as these sectors are proportionately regulated, they could bring vital dynamism to the economy for years to come.
Quite simply, businesses do not invest in workers unless they have a high degree of confidence, and/or are expanding. Employers are voting with their feet, and have done consistently for the past five or six years. Whatever the future may hold in terms of the economic cycle, an economy with a robust, powerhouse labour market is always going to be best placed to deal with it. And, in this respect, Britain is in a position of strength which is the envy of many. Let’s just hope wage growth now begins to follow suit.
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