Latest improvement in labour market expected, but pay growth remains strikingly weak - EY ITEM Club comments

14 May 2014

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  • Unemployment drops again…
  • But pay growth also falls…
  • and still no sign of a rebound in productivity

Martin Beck, senior economic adviser to the EY ITEM Club said on today’s labour market data:

“The latest output and survey data point to the economic recovery powering ahead, so a further improvement in the labour market in the three months to March was to be expected. Employment rose by 283,000, the biggest three month increase since records began in 1971. Meanwhile, the drop in the unemployment rate from 6.9% to 6.8% brought it closer to the MPC’s current estimate of the ‘equilibrium’ unemployment rate consistent with stable inflation. That said, the Bank’s May Inflation Report, to be published later this morning, may see the MPC push down its view of the ‘equilibrium’ rate, implying that a decent degree of slack in the labour market still remains.

“The latest data on pay growth would support a dovish view. Average earnings in March grew at an annual rate of only 1.5%, down from 1.9% in February. With inflation running at 1.6% in March, the much trumpeted recovery in real pay last month has turned out to be short-lived. So pay growth remains strikingly weak despite rapid falls in unemployment. 

“Without a pick-up in productivity growth, sustained increases in real pay will be hard to achieve. The latest employment data paints a gloomy picture here. Employment grew by 0.9% in the three months to March, above the estimated 0.8% rise in GDP. So it looks like output per worker fell slightly in Q1, but we still anticipate a recovery in productivity and pay growth over the next year. Those fearing that the economic recovery will be accompanied by a surge in inflation driven by rapid wage increases look increasingly wide of the mark.”