Pay rises are accelerating and the labour market is still roaring

Manufacturing wages are rising with very few deferrals or freezes

Our Pay Bulletin has seen a quite sustained growth in manufacturing wages in the last few months.

As the graph above shows, an annual three-month average growth between 2.2% and 2.5% has been recorded in the last six months. However the big news is about the extremely low number of pay freezes and deferrals. After a year characterised by companies not keen to offer an immediate pay rise, it appears that the first months of the year have unblocked this situation. The record of nine uninterrupted months of manufacturing output growth must have played a role on it. 

Wages are up and CPI is down, but we might need to wait a little bit longer for real growth

After a long week of calm on the data front, this week saw two major releases well interconnected with each other.

On Tuesday, the ONS released price data and annual CPI growth fell from 3.0% to 2.7%. This sharp reduction was not completely unexpected since it was highly related to the “base effect” February 2017 data brought. Last year in February, CPI jumped from 1.8% to 2.3% and the month was characterised by an important acceleration of consumer prices, in particular those related to transportation.

On Wednesday, it was the turn of labour statistics, and earnings for the total economy had an annual increase of 2.6% in the three months to January, rising to 2.8% when bonuses are taken into account.

As said earnings data are for January and CPI in that month was still 3.0%, so real wages are still in negative territory. Moreover after discounting the CPI February “base effect”, we might actually see a rebound in CPI growth in the next months above the 2.7% of the latest reading.

The whole economy should be patient for few more months to see their nominal wages running faster than inflation. However employees in the manufacturing sector may see this cheerful event coming sooner. The ONS, indeed, estimated a three-month annual pay growth of 2.9% in January (3.1% including bonuses) for the sector. This reading came in stronger than our last Pay Bulletin but the trend is broadly in line with the official figures.

Unemployment and employment are doing great, are there any further measures to look at?

Since the “Great Recession” of 2008-09 the UK recovery has been characterised by a great labour market performance.

Unemployment is currently down at 4.3% which is the best performance since 1975 and one of the best across western economies. Employment is also flying high with the highest level since record began (75.3%), and the same story can be told about inactivity rates.

So, looking at these numbers, it looks like there is absolutely no slacks in the current job market. Well, there is possibly still a little bit of room.

The graph above shows the situation for so called “extended” unemployment, known as U-6 unemployment in the US. This is one of the favourite measures of unemployment used by the US Federal Reserve and the reason behind it is linked to the impact that part-timers and “discouraged workers” may have on the labour market.

The extended unemployment measure is calculated summing up unemployed, underemployed part-timers (those who would like to work more), and inactives who would like to work but may not start a new job immediately or they are not currently seeking one.

The situation for “discouraged workers”, those not actively seeking, has improved overtime and the current level is lower than the one in 2008. The picture is quite different for the under-employed: in 2017 there were 1.5 million part-timers who would have liked to work more. This number is slightly higher than the number of unemployed and it is still way above the level of 2008. At that time the under-employment ratio was equal to 3.9% and today is at 4.4%, a possible hint on how the UK labour market is still not completely full, even if it has marched towards the lower bound limit for several years.