Press release

21 Jan 2020 London, GB

Labour market shows remarkable strength in face of limited economic activity and heightened uncertainties

A pretty remarkable performance by the UK labour market, especially as it came at a time when uncertainties were particularly marked and the economy was clearly struggling.

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  • A pretty remarkable performance by the UK labour market, especially as it came at a time when uncertainties were particularly marked and the economy was clearly struggling. Employment jumped 208,000 in the three months to November to reach a new record high of 32,901 million, beating the previous peak of 32.811 million achieved in the three months to June 2019.
  • Uncertainties were particularly heightened in November while data shows GDP contracted 0.3% month-on-month. Even allowing for employment being a lagging indicator and the data being helped by a weak August performance dropping out of the calculation, a jump of 208,000 in the number employed in the three months to November looks remarkable.
  • Reinforcing the impressive performance, the employment rate rose to a record 76.3% and vacancies rose for the first time in a year. Unemployment fell a modest 7,000 keeping the unemployment rate down at 7.4% (the lowest since late-1974).
  • Earnings growth stabilised after recently falling back from peak levels seen around mid-2019. Annual earnings growth was stable at 3.2% in the three months to November, the lowest since the three months to September 2018. Regular earnings growth edged down to 3.4%, the lowest since the three months to April 2019. 
  • The sharp jump in employment in the three months to November could be seen as diluting the need for an imminent interest rate cut by the Bank of England and giving the MPC more time to see whether or not the economy appears to be picking up amid reduced uncertainties following the decisive General Election.
  • Overall, the labour market has been remarkably resilient – 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. 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 decisive General Election result and the UK’s exit from the EU on 31 January with a deal has diluted some of the uncertainties facing companies and this should provide some support to employment. Indeed, there is already some survey evidence to suggest this is the case.
  • Nevertheless, this is far from the end of Brexit and other uncertainties (including a still challenging global environment) facing the UK economy and the growth outlook for 2020 still appears relatively limited which is likely to limit the upside for the labour market.
  • We suspect that earnings growth will likely stabilise around current levels. With businesses’ still having some concerns and uncertainties over the outlook, we suspect that they will be keen to contain pay increases. 

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

“The latest UK jobs data are remarkably strong, given the heightened uncertainties facing the economy in the late months of 2019 (heightened domestic political, Brexit and a difficult global economy) as well as a struggling economy.

“Uncertainties were particularly heightened in November while data shows GDP contracted 0.3% month-on-month. Even allowing for employment being a lagging indicator and the data being helped by a weak August performance dropping out of the calculation, a jump of 208,000 in the number employed looks remarkable.

“The 208,000 jump in employment in the three months to November took the level to a new record high of 32.901 million (up from 32.801 million in the three months to October). This took it above the previous high of 32.811 million achieved in the three months to June.

“The employment rate climbed to a record high of 76.3% from 76.2% in the three months to October and 76.0% in the three months to September.

“Once again the UK labour market has surprised by its strength. Indeed, the labour market has been remarkably resilient even allowing for its recent limited relapse – 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. 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.

“Additionally, the number of vacancies rose for the first time in 12 months to stand at 805,000 in the three months to December. This was up from 794,000 (the lowest in more than two years) in the three months to November. It had fallen consistently to the November low 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 2019.

“The number of unemployed dipped 7,000 in the three months to November to be at 1.306 million; this kept the unemployment rate at 3.8% in the three months to November (which is the equal lowest level since the end of 1974) after originally dipping back to this level in September from 3.9% in the three months to August. This followed unemployment dips of 13,000 in the three months to October and 23,000 in the three months to September. There had earlier been an increase of 22,000 in the three months to August (when the level stood at 1.314 million).

“Latest survey evidence suggests that the labour market may have got some help from December’s decisive General Election result. There were reports that some businesses had approved new hires after a long period of delayed decisions. However, placement growth remained well below average. Furthermore, while job vacancies also rose modestly, they were still not that far above November’s lowest level since October 2009.

“Meanwhile, the December purchasing managers surveys indicated that employment grew at the fastest rate for five months in the services sector in December, although the increase was still modest. Employment continued to contract in both the manufacturing and construction sectors, but at reduced rates in both cases.  

Earnings growth little changed

“Annual earnings growth was stable at 3.2% in the three months to November, which is the lowest level since the three months to September 2018. It had previously fallen back sharply to 3.2% in the three months to October 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 rose back up to 3.3% in November itself after falling sharply to 2.4% in October 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 sharply in October and then modestly helped back up in November by the impact of bonus payments.

Underlying earnings growth softened a little further

“Annual regular earnings growth (which strips out bonus payments) slowed to 3.4% in the three months to November, taking it down to the slowest rate since the three months to April; it was down from 3.5% in the three months to October, 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 edged back up to 3.3% in November itself after dipping to a seven-month low of 3.2% in October 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.

“ONS data show that real earnings growth edged up to 1.6% in the three months to November after moderating to 1.5% in the three months to October, which was the lowest since the three months to May. It had fallen back to October’s low from 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 just 0.1% in the three months to June 2018. 

“Regular real earnings growth was stable at 1.8% in the three months to November, 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, still appreciable consumer concerns and uncertainties may facilitate companies’ ability to limit earnings.

“There is survey evidence that pay awards have at least levelled off.

“The Bank of England’s regional agents also reported in their December quarterly survey of business conditions that “pay settlements remained in a range of 2%-3%, though awards were higher for staff on the National Living Wage and roles where there were shortages of skilled labour. More contacts said they needed to constrain pay growth as a result of tighter margins and weak productivity growth. There were also more reports of firms freezing or planning to freeze pay, although this was not widespread.”

“The latest survey XpertHR showed that median annual pay settlements edged up to 2.8% in the three months to November from 2.7% in the three months to October and 2.5% in the three months to September, taking it to the highest since December 2008. Significantly though, XpertHR observed that the October and November data were based on a small number of pay deals and observed that ‘our annual measure of pay settlements continues to show a median 2.5% pay award during 2019. We expect employers to stay close to this figure as we head into 2020.’”