EY ITEM Club

Special Report on the UK Labour Market

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Where next for the UK labour market?

The strong labour market has been key to recent economic performance

 

The labour market has had a major influence on the UK’s economic performance in recent years, with rising employment supporting growth in consumer spending. However, the increase in employment has not been accompanied by wage growth at the rate we would have expected based on the historic relationship between levels of unemployment and pay. The UK’s productivity performance has also been disappointing.

Looking forward, factors including Brexit, technological change, demographics and Government policy could all potentially disrupt the UK labour market and change the environment for businesses. So this latest EY ITEM Club special report on the UK labour market is particularly timely in providing an in-depth analysis of the factors influencing its future structure and size.

Signs of a slowing jobs market…

As measured by the Labour Force Survey (LFS), the rate of joblessness in the UK – at 4.7% in February 2017 – is the lowest since 2005, and at a level achieved only rarely in the past 40 years. However, the rate of improvement in the labour market is slowing, and in the last quarter of 2016 was only half the rate of the previous year.

…and no significant uptick in pay…

With unemployment falling, it is hard to explain why pay growth has failed to accelerate. In September 2005, when unemployment was at similar levels, average earnings were increasing by almost 5% year-on-year. Yet pay increases have mostly remained stubbornly anchored between 2% and 3% since 2010.

…leave us working to understand what is driving the market…

The EY ITEM Club identifies several reasons for the change in the relationship between unemployment and pay:

  • Lower productivity may have played a role, as real wage growth and productivity improvements have historically gone hand-in-hand;
  • A decline in the “equilibrium” unemployment rate, as a result of increasing labour market flexibility and rising self-employment;
  • Increased “slack” in the labour market, with more than twice the number of officially unemployed people wanting more work;
  • Growth in labour supply, due to a higher number of older people in the workforce and increased migration;
  • The impact of austerity reducing public sector pay; and
  • Shifts in the sector mix and the composition of employment, such as a decline in higher paid jobs.

What’s clear is that there is no simple explanation for the changing nature of the UK labour market. This means businesses cannot assume the current conditions will continue into the future – especially since other factors may come into play.

…and how market conditions will evolve in the future…

As the recent EY ITEM Club Spring Forecast showed, the UK economy is starting to slow. This will lead to reduced demand for workers, with employment growth projected to slow to 0.6% in 2017 and 0.1% in 2018 from 1.4% in 2016. This decline in demand is likely to be matched by a reduction in supply, as the rate of growth in older workers slows and migration levels fall back, even before Brexit, reflecting changes in the relative economic performance of the UK and the EU. Unemployment is forecast to edge upwards, reaching 5.8% on the LFS measure in 2019.

With detailed negotiations on the terms of the UK’s exit yet to begin, the impact of Brexit is currently difficult to predict. Similar uncertainty surrounds the impact of technology on the demand for labour, with views varying widely both on its potential size and timescale. The EY ITEM Club cites two studies which suggest the proportion of all jobs at risk ranges from 9% to 47%.

…so paying close attention to market developments is essential.

The labour market has surprised most observers in recent years, and may continue to do so. Businesses certainly need to monitor developments in employment and pay at the macro level to identify potential shifts in the market and analyse the implications for their own organisations.

Key areas to focus on are:

  • Assessing future demand for labour across the business covering roles and skills, identifying areas that could potentially be impacted by changes in labour supply – especially due to Brexit, such reduced availability of workers with specific skills currently sourced from EU countries – and developing contingency plans.
  • Monitoring developments in pay for specific roles and skills, to ensure that rewards remain competitive and identify potential risks to margins from pockets of wage inflation.
  • Considering whether to invest more in skills development and training to improve the contribution of the existing workforce, encourage retention and potentially address emerging labour supply gaps and wage pressures.
  • Continuing to review opportunities to use technology to reshape the workforce across the business.
  • Tracking the progress of the Taylor Report on employment, which may affect the classification of ‘employees’ and therefore the economics of some segments of the labour market.
 

EY have been sole sponsors of the ITEM Club for 25 years. It is the only non-governmental forecasting group to use HM Treasury's model of the UK economy. Our reports provide a detailed economic analysis and forecast of economic activity for the period ahead. They are independent of any political, economic or business bias.

Contact

EY - Mark Gregory

Mark Gregory

EY Chief Economist