Press release

17 Dec 2019 London, GB

Labour market resilience re-emerges after recent softening

Once again the resilience of the UK labour market has been surprising.

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EY UK

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  • Once again the resilience of the UK labour market has been surprising. Some welcome news for the UK economy as latest labour market data are firmer overall after recent softening. However, earnings growth continued to moderate from the peak levels seen around mid-year.
  • While modest, the renewed firming in the labour market is somewhat surprising and certainly resilient – given a struggling UK economy and recent heightened domestic political and Brexit uncertainties. On top of this is a weakened and uncertain global economic environment. 
  • Overall, the labour market has been remarkably resilient and even its recent limited relapse took its time to occur – which has been good news for UK consumers, but has been bad news for UK productivity given lacklustre growth. The labour market has undoubtedly been helped by businesses preferring to employ rather than commit to investment given current heightened uncertainties and the fact that employment is relatively low cost and easier to reverse if business subsequently stalls. It also needs to be noted that employment is a lagging indicator so the overall weakness in economic activity since the first quarter and mounting uncertainties took its time to feed through.
  • Employment rose 24,000 in the three months to October, in contrast to a dip of 58,000 in the three months to September. This took employment back up to 32.801, only just below the record high of 32.811 million seen in the three months to June. The employment rate rose to a new record high of 76.2%. Meanwhile, unemployment dipped 13,000 to 1.281 million, keeping the unemployment rate at 3.8% (the lowest since late-1974).
  • However, job vacancies dipped to 794,000, the lowest level in more than two years.
  • Earnings growth continued to ease back from the record highs seen around mid-year. Annual earnings growth slowed sharply to 3.2% in the three months to October, the lowest since the three months to September 2018. While this was affected by lower bonus payments, regular earnings growth slowed to 3.5%, the lowest since the three months to April. 
  • The decisive General Election result and the UK departure from the EU with Boris Johnson’s deal on 31 January should dilute some of the uncertainties facing companies and this should provide some support to employment. Nevertheless, this is far from the end of the problems and Brexit uncertainties facing the UK economy and the growth outlook for 2020 still appears limited, which is likely to weigh on the labour market.
  • We suspect that earnings growth will likely stabilise around current levels. With businesses still likely to be cautious over the outlook, we suspect that they will increasingly look to contain pay increases. Meanwhile, heightened consumer concerns and uncertainties may increasingly facilitate companies’ ability to limit earnings. 
  • The resilient labour market eases pressure on the Bank of England to cut interest rates in the near-term and makes unchanged monetary policy on Thursday after the December MPC meeting all the more likely. The MPC had pointed to evidence that the labour market is turning as a factor in the more dovish stance adopted at its November meeting when two of the nine members voted for interest rates to be cut from 0.75% to 0.50%. However, softening pay growth facilitates the Bank of England cutting interest rates in the early months of 2021 if the UK economy fails to show clear signs of picking up appreciably.  

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The latest jobs data are firmer overall – after there had recently been some signs that the labour market had started to falter in the face of overall soft domestic economic activity, a weakening global economy and recent heightened Brexit and domestic political uncertainties.

“Once again the resilience of the UK labour market has been surprising. Even its recent limited relapse took its time to occur – which has been good news for UK consumers, but bad news for UK productivity given lacklustre growth. The labour market has undoubtedly been helped by businesses preferring to employ rather than commit to investment given current heightened uncertainties and the fact that employment is relatively low cost and easier to reverse if business subsequently stalls. It also needs to be noted that employment is a lagging indicator, so the overall weakness in economic activity since the first quarter and mounting uncertainties took its time to feed through.

“The “flash” December purchasing managers survey indicated that combined employment in the services and manufacturing sectors fell for a fourth successive month in December; it was also down markedly in the construction sector in November.

“However, bucking the trend, the CIPD reported in its November quarterly survey that its balance for employers’ net employment plans had risen to +22 from an 18-month low of +18.

The jobs data

“Employment unexpectedly rose 24,000 in the three months to October; this was in marked contrast to a drop of 58,000 in the three months to September, which had been the largest drop since the three months to May 2015.

“At 32.801 million in the three months to October, the employment level was up from 32.753 million in the three months to September and only just below the record high of 32.811 million seen in the three months to June. 

“The employment rate rose to a new record high of 76.2% in the three months to October after dipping to 76.0% in the three months to September from the previous high of 76.1% in the three months to June. It had first reached 76.1% in the three months to April, although it did suffer a dip to 76.0% in the three months to May.

“However, the number of vacancies fell for a 10th successive month to be at 794,000 in the three months to November. This was the lowest in more than two years and down from 800,000 in the three months to October, 814,000 in the three months to September and a peak of 861,000 in the three months to January.

“The number of unemployed dipped 13,000 in the three months to October to be at 1.281 million. This followed a dip of 23,000 in the three months to September, (when the level was 1.306 million) and an increase of 22,000 in the three months to August (when the level stood at 1.314 million).

“The unemployment rate was stable at 3.8% in the three months to October (which is the equal lowest level since the end of 1974) after dipping back to this level in September from 3.9% in the three months to August.

Earnings growth fall back further from 11-year high in three months to September

“Annual earnings growth fell back sharply to 3.2% in the three months to October, which was the lowest level since the three months to September 2018; it was down from 3.7% in the three months to September and August and 3.9% in the three months July, which had been an 11-year high. Earnings growth had previously climbed to 3.9% in the three months to July (the highest since mid-2008) from 2.4% in the three months to June 2018.

“Annual earnings growth fell sharply to 2.4% in October itself from 3.6% in September; it had been up at 3.9% in July and peaked at 4.0% in May This was up from just 2.4% in June 2018).

“Annual earnings growth includes bonus payments which can be erratic. Indeed, annual earnings growth was pulled down in October by sharply lower bonus payments year-on-year.

“Annual regular earnings growth (which strips out bonus payments) slowed to 3.5% in the three months to October, which was the slowest rate since the three months to April; it was down from 3.6% in the three months to September, 3.8% in the three months to August and an 11-year high of 3.9% in both the three months to July and June. It had previously risen to the peak of 3.9% in the three months to July/June from 2.7% in the three months to June 2018.

“Regular earnings growth was 3.2% in October itself, which was a seven-month low; it was down from 3.6% in September and a peak of 4.0% in June. It had first reached 4.0% in April and has increased from 3.1% in March.

“Consequently, ONS data show that real earnings growth amounted to 1.5% in the three months to October, which was the lowest since the three months to May; it was down from 1.9% in the three months to September and a peak of 2.0% in the three months to July (the best since from September 2015). It had previously climbed to July’s peak from 1.9% in the three months to June, 1.5% in the three months to May and 1.3% in the three months to April. It is up from just 0.1% in the three months to June 2018. 

“Regular real earnings growth was stable at 1.8% in the three months to October, which was the lowest since the three months to May; it was down from 1.9% in the three months to August and a peak of 2.0% in the three months to June. It had climbed to the peak of 2.0% from just 0.3% in mid-2018.

“We suspect that earnings growth will likely stabilise around current levels. With businesses likely still cautious over the outlook, we suspect that they will increasingly look to contain pay increases. Meanwhile, heightened consumer concerns and uncertainties may increasingly facilitate companies’ ability to limit earnings.

“There is survey evidence that pay awards may be levelling off.

“Pay analysis company XpertHR reported in late October that employers plan to scale back their pay increases for next year. Specifically, employers plan to offer median pay settlements of 2.1% between now and the end of August 2020, compared to an average 2.5% over the past 12 months. However, latest data from XpertHR show that median annual pay settlement rose to 2.8% in the three months to October, which was the highest since December 2008 and up from 2.5% in the three months to September. XpertHR did indicate though that the latest data were based on a small number of pay deals and “a handful of higher level deals had inflated the median”.”