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Unemployment Falls But Wage Growth Slows

Savers and borrowers alike looked to today's jobs figure as an indication of whether to expect interest rates hikes soon, but slow wage growth has bought more time

Morningstar News Team 16 July, 2014 | 2:50PM

The UK unemployment rate declined to the lowest since 2008 as employment hit record high, but earnings growth remained weak squeezing consumers' purchasing power.

The jobless rate for March to May fell to 6.5% of workforce, the lowest since the last quarter of 2008, reported the Office for National Statistics. The rate was in line with economists' expectations.

“With the Monetary Policy Committee linking interest rate prospects to its estimates of the amount of economic slack, and tying its view on spare capacity to conditions in the labour market, figures on the labour market are closely watched by markets and policymakers,” said Investec Bank’s Philip Shaw.

“Today’s numbers, show that the rate of unemployment fell again in the three months to May, edging down a notch to 6.5%, a drop in absolute terms of 121,000 over the period. The decline in the jobless rate matched both consensus forecasts.”

During March to May, there were 2.1 million unemployed, 121,000 fewer than from December to February. The number of people in work surged 254,000 from February to 31 million, the highest on record.

Despite the decline in unemployment, wage growth eased further, squeezing purchasing power of consumers. Pay including bonuses for employees for March to May was 0.3% higher than a year earlier, the weakest expansion since May 2009, compared to the 0.5% rise forecast by economists. At the same time, earnings excluding bonuses were up by just 0.7%, the slowest on record.

Ongoing very low earnings growth suggests that there is still an appreciable amount of labour market slack with little pressure on inflation coming from pay, IHS Global Insight's Chief UK Economist Howard Archer said.

The labour market statistics gained much importance after the Bank of England linked its interest rate to unemployment last August.

Bank of England governor Mark Carney then swiftly modified his forward guidance plan for interest rates as unemployment started falling more sharply than anticipated.

Early this year, the BoE said the interest rate would not be raised from 0.50% until the slack in the labour market is exhausted.

With the majority of the evidence pointing to the economy still seeing healthy growth and the unemployment rate coming down markedly, IHS Global Insight's Archer believes that the first interest rate hike to 0.75% from 0.50% is more likely to occur in late-2014 than early-2015, but said it is a tight call.

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