Expect a boost to consumer spending power next year
Data released today by the Office for National Statistics showed that the UK unemployment rate stood at 6.0% in the three months to September. This was down from 6.3% in the three months to June and 7.6% in the same period a year earlier. The last time the unemployment rate was lower was in 2008.
Other labour market measures suggest slack in the market is diminishing. The proportion of those working part time only because they couldn’t find a job with longer hours fell to 16.5% on the latest data, down from 18.4% in the same period a year ago. However, this measure still has some way to go – pre-financial crisis levels were less than 10%.
Despite declining unemployment, earnings data remain extremely weak. Employee pay including bonuses was just 1.0% higher than a year earlier. Excluding bonuses, pay was 1.3% higher than a year ago.
The labour market has been a constant source of puzzlement among those economists that have looked to the past to predict the future. In previous downturns and the recoveries that have followed, earnings growth has recovered but unemployment has tended to fall fairly slowly. This is what happened in the early 1990s.
The current economic recovery has seen the opposite pattern. Unemployment has fallen sharply, but wage growth has plummeted and remains subdued. This reflects a number of factors. First, unemployment didn’t rise as much as thought during the downturn, as companies held on to staff to avoid rehiring costs. This staff retention was partially funded through pay restraint. Secondly, the UK is going through a period of little productivity growth. The economic downturn saw high-productivity, high-pay jobs in sectors such as financial services disappear. Much of the jobs created since then have been lower productivity, leading to lower pay. This has brought down average earnings.
2015 is likely to see a slight rebalancing away from job creation and towards pay growth. Our survey work with the ICAEW shows staff turnover and skills are a growing issue for businesses, which will lead firms to increase pay packets at a faster rate next year. We expect earnings growth of about 2% in 2015 which, combined with very low inflation as food and transport prices fall, will lead to a big boost to consumer spending power next year.
