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The good news keeps on coming from the labour market

As Lee said in our week ahead preview, the labour market’s on-going resilience has ceased to be surprising, with a succession of historical highs (and lows) hit in the employment and unemployment figures respectively over the last year.

And this month we saw a continuation of this trend. The unemployment rate remained at 4.0% - its lowest level for 43 years, and the numbers in employment, while dipping back marginally (suggesting an easing in momentum), remain at levels not seen since records began.

So good news again…but nothing new here.



Vacancies on the up

While more and more people are in work – employers appear to need more. This was backed up by our recent Investment Monitor, which highlighted that manufacturers have a preference to hire more workers to meet additional demand, leading to more vacancies in the process.

Indeed total vacancies were up again in September, and up 4% and 11% from their levels one and two years ago respectively. Therefore the labour market is tightening. This, as traditional economic theory dictates, should translate into higher wages, given employees now have stronger bargaining power…

And happily - after a lag we coined the “wage puzzle” – this is happening.



Pay growth continues to accelerate

In the three months to August, total regular pay growth was 3.1%, up from 2.9% in the previous month. This is the fastest rate of increase in pay for nearly a decade, back when we were in the depths of the financial crisis. It appears therefore that competition (and scarcity) for workers is finally feeding through to higher pay packages.

While this is encouraging news (for workers anyway), the notable increase in pay is being offset by inflation’s trajectory. CPI was at 2.7% in August, and 2.5% over the three months to August, taking a sizeable chunk out of workers real pay packages.


However with inflation expected to recede over the coming months, and the labour market looking in good shape, is this the start of the “new dawn” in British wage growth the Bank’s Chief Economist Andy Haldane cited last week?


Too soon to judge…but what implications for Super Thursday?

We believe it is still a little too soon to be sure that worker scarcity will continue to drive wage growth upwards over a longer period, especially given the notable differences between sectors, with manufacturing pay growth (2.3%) lagging but construction running ahead (4.6%). But initial signs are encouraging.

Looking ahead to next month, today’s data are in line with the Bank’s overall forecasts of wage growth around the 3% mark by the end of the year. The Bank should be buoyed by the fact that consumers should be better placed to handle higher interest rates should the Bank need to increase them next month. Inflation data – out tomorrow – will also have a bearing on this.

For the time being however, until the outcome of Brexit negotiations becomes clearer, any rate rises are unlikely no matter the direction of pay growth.



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