- The UK labour market showed impressive strength at the end of 2019, especially given that it came at a time when uncertainties were rife and the economy was stagnating. Employment was up 180,000 in the three months to December to reach a new record high of 32.934 million.
- Reinforcing the impressive performance, the employment rate rose to a record 76.5% and vacancies rose for a second month running. Unemployment fell 16,000 keeping the unemployment rate down at 7.4% (the lowest since late-1974).
- Even allowing for employment being a lagging indicator, a rise of 180,000 in the number employed in the three months to December looks impressive.
- Despite the healthy employment growth, earnings growth slowed further from the peak levels seen around mid-2019. Annual earnings growth amounted to 2.9% in the three months to December, the lowest since the three months to August 2018. Regular earnings growth dipped to 3.2%, the lowest since the three months to September 2018.
- The moderation in total earnings growth has been exaggerated by lower and erratic bonus payments. While regular earnings growth has clearly moderated, the slowdown has been less pronounced.
- The further notable increase in employment in the three months to December could be seen as diluting the need for a near-term interest rate cut by the Bank of England, although much will depend on whether or not hard data shows the economy picking up over the early months of this year.
- The labour market has been remarkably resilient – 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.
- December’s decisive General Election 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.
- Nevertheless, UK-EU relationship uncertainties have far from disappeared while the global economic environment is currently difficult and uncertain, so this may 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 jobs data are impressively strong given the heightened uncertainties facing the economy in the final months of 2019 (heightened domestic political, Brexit and a difficult global economy) as well as a stagnating economy over the fourth quarter.
“Even allowing for employment being a lagging indicator a rise of 180,000 in the number employed in the three months to December looks impressive, although it was down modestly from an increase of 208,000 in the three months to November.
“The 180,000 rise in employment in the three months to December took the level to a new record high of 32.934 million in the three months to November.
“The employment rate climbed to a record high of 76.5% from 76.3% in the three months to November, 76.2% in the three months to October and 76.0% in the three months to September.
“Additionally, the number of vacancies rose for a second month running to 810,000 in the three months to January, taking it to the highest level since last September. It was up from 803,000 in the three months to December and 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 16,000 in the three months to December to be at 1.290 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). This followed unemployment dips of 7,000 in the three months to November, 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).
“Survey evidence suggests that the labour market may have got some help from December’s decisive election result. The January purchasing managers surveys indicated that employment grew at the fastest rate for six months in the services sector in January while it stabilised in the manufacturing sector after falling over the previous nine months. Employment fell at the slowest rate for five months in the construction sector and only marginally.
Earnings growth moderated further from peak levels seen around mid-2019
“Annual earnings growth slowed to 2.9% in the three months to December, which is the lowest level since the three months to August 2018. This was down from 3.2% in the three months to both November and October, 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 back to 2.8% in December itself after rising back up to 3.4% in November from 2.4% in October. It was 3.6% in September. it peaked at 4.0% in May 2019, which was up from just 2.4% in June 2018.
“Annual earnings growth includes bonus payments which can be erratic. Indeed, the recent yo-yoing in annual earnings growth has been significantly influenced by swings in bonus payments.
Underlying earnings growth softened further
“Annual regular earnings growth (which strips out bonus payments) slowed to 3.2% in the three months to December, taking it down to the slowest rate since the three months to September 2018; it was down from 3.4% in the three months to November, 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 stood at 3.2% in December itself, which was unchanged from both November and October, and is the lowest level since March 2019. It had peaked at 4.0% in June 2019.
“ONS data show that real earnings growth slowed to 1.4% in the three months to December, which was the lowest since the three-month to April 2018. It has fallen back from 1.6% in the three months to November, 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 just 0.1% in the three months to June 2018.
“Regular real earnings growth was stable at 1.8% in the three months to December, 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 notable consumer concerns and uncertainties may facilitate companies’ ability to limit earnings.
“There is survey evidence that pay awards have at least levelled off. The latest survey by XpertHR showed that median annual pay settlements slowed to 2.2% in the three months to December from 2.6% in the three months to November. This meant that they averaged 2.5% over 2019, the same as in 2018. Early data for January put median settlements at 2.3%. XpertHR commented that “the first pay deals of 2020 suggest that employers are taking a cautious approach, leading us to believe that there will be no jump in pay award levels in 2020.”
“The Bank of England’s regional agents 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.”