UK’s unemployment rate falls to a 42-year low

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The monthly jobs report from the UK was a mixed bag with the unemployment rate falling to a 42-year low at 4.5%, down from 4.6% previously. Despite the solid headline, wages continued to disappoint.

The unemployment rate fell to 4.5% and marked the lowest unemployment rate in the UK since 1975. Official data from the UK’s Office for National Statistics also showed that the number of people out of work and claiming benefits fell by 64,000 during the three months of March through May.

The employment rate also jumped to 75.9%, marking a record high.

UK Employment Rate (Source: ONS)
UK Employment Rate (Source: ONS)

Construction and accommodation and foods services sectors showed the highest increase in creating jobs.

The proportion of jobs that accounts for manufacturing, mining and quarrying sectors fell to 7.7% from 26.4% between the periods of June 1978 when record keeping started through March 2017. Services sector, on the other hand, increased from 63.2% to 83.5% during the same period.

Wages continue to fall

Despite the upbeat unemployment rate, evidence of wage growth continues to evade. The unemployment report showed that the average weekly earnings in nominal terms increased 1.8% which also includes bonuses. This was for the period of March through May.

UK Wage Growth (Source: ONS)
UK Wage Growth (Source: ONS)

Excluding bonuses, wages rose 2.0% on a year over year basis. This showed a somewhat modest improvement, up from 1.7% in April and slightly above the consensus estimates of 1.9%.

Compared to inflation, which stands at 2.9% as of May, the gap between wage growth and inflation continues to widen.

Commenting on the report, Matt Hughes, a senior statistician from the ONS said that the overall picture of the UK’s labor market was little changed from the previous month. Hughes said that although the jobs picture was strong, “there has been another real-terms fall in total earnings, with the growth in weekly wages low and inflation still rising.”

Real wage growth which takes into account inflation rate, however, turned negative on a year over year basis. According to the ONS’ report, real wages excluding bonuses declined 0.5% in the three months to May.

Implications for the Bank of England

The jobs report comes at a time when the Bank of England is considering an interest rate hike. The BoE Governor, Carney conveyed his hawkish forward guidance during the banking conference in Portugal a few weeks ago.

The BoE chief’s comments come at a time when at the last BoE meeting, three policy makers voted to hike interest rates.

The differences continue as the latest policymaker from the Bank of England, Ben Broadbent, commented in an interview earlier this week that the central bank was not ready to raise interest rates just yet.

Ben Broadbent is the deputy governor of the BoE. He said that the mood among the business community was important in shaping his views as he said that hiking interest rates could be “very difficult.”

However, Broadbent and other doves in the BoE’s policy making committee could begin to shrink as more policy makers are wavering towards hiking interest rates.“In my opinion, it is a bit tricky at the moment to make a decision (to raise rates). I am not ready to do it yet,” Broadbent said.

Besides the BoE Governor who is seemingly in support of a rate hike, other hawks include Andy Haldane, the chief economist as well who has been very vocal in supporting the case for an interest rate hike.

Rightfully, it is going be a tricky case for the UK’s central bank which will need to play a balancing act between reining in inflation while at the same time keep monetary policy accommodative in order for wages to grow, all the while without putting any further pressure on household income.

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