Press release

16 Jul 2020 London, GB

Slower decline in UK labour market does not mask challenge to recovery from unemployment – EY ITEM Club comments

Latest labour market data is not as bad as had been feared and indicates that the rate of decline slowed. However, unemployment still a challenge to the UK’s recovery.

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Related topics Growth COVID-19
  • The jobs market is under pressure. A significant number of redundancies have been announced in July across a number of sectors, particularly retail
  • Impact on the labour market has been limited by companies’ ability to furlough workers. However, this scheme is starting to be tapered in August and will end in October – this seems to be increasingly influencing companies’ decisions
  • Claimant count unemployment fell by 28,100 in June to 2.6308 million from a high of 2.6589 million in May. This followed large increases in May (566,400) and, especially, April (852,900). Claimant count unemployment is still up 1.3912 million (112.2%) since March
  • HMRC and ONS Pay as You Earn Real Time Information data indicates that the number of paid employees in June was down 649,000 (2.2%) from March. The ONS observed that the largest falls were seen at the start of the pandemic and, while the number of payroll employees is still falling, the decline is slowing
  • More evidence of a weakening labour market in the latest ILO jobs data: the number employed fell 126,000 in the three months to May, which was the largest three monthly fall since 2011. This took the level of employment down to 32.948 million in the three months to May from the record high of 33.114 million in the three months to March
  • Job vacancies were limited to a record low of 333,000 in the three months to June
  • The ILO data also showed the number of unemployed fell 17,000 in the three months to May to 1.346 million; the unemployment rate remained at 3.9% in the three months to May
  • The ILO data showed a further slowdown in annual earnings in May, influenced by the furlough effect and pay looks set to continue to be affected over the coming months. Annual average earnings fell 1.2% year-on-year in May, and were down 0.3% year-on-year in the three months to May. Regular earnings growth was flat year-on-year in May and up just 0.7% year-on-year in the three months to May
  • The increased squeeze on workers’ purchasing power was highlighted by real earnings growth falling 1.9% year-on-year in May itself and being down 1.3% year-on-year in the three months to May
  • The EY ITEM Club’s expectation is that the ILO unemployment rate will get up to around 9.0% late in the year before stabilising and then starting to fall back. However, there is a risk that unemployment will rise more than this

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

“The performance of the labour market will be crucial to the economy’s recovery, both in the near term and further out. It is critical both for the economy’s near-term recovery prospects as lockdown restrictions are eased – and for limiting the impact to it further out – that as many jobs can be saved as possible.

“The damage to the labour market has been substantially limited by companies’ ability to furlough workers under the government’s Coronavirus Job Retention Scheme. Latest data from the Treasury show that the job retention scheme now covers 9.4 million workers, costing £28.7 billion so far.

“The Chancellor has clearly sought to protect as many jobs as possible once the furlough scheme ends in October as well as encourage employment with a number of initiatives in his Summer Statement. However, it is uncertain how effective these measures will be, and he may well need to come up with further measures in the Budget.

“Fuelling concerns over the labour market, a substantial number of redundancies have been announced so far in July across a number of sectors, and particularly in the retail sector. Furthermore, a survey by Make UK revealed that some 46% of manufacturers expect to make redundancies over the next six months, up from 25% in May.

“Claimant count unemployment fell by 28,100 in June to 2.6308 million from a high of 2.6589 million in May. This followed large increases in May (566,400) and, especially, April (852,900). Consequently, claimant count unemployment was still up 1.3912 million (112.2%) since March.

“Additionally, HMRC and ONS Pay as You Earn Real Time Information data indicate that the number of paid employees in June were down 649,000 (2.2%) from March. The ONS observed that the largest falls were seen at the start of the pandemic and, while the number of payroll employees is still falling, the decline is slowing.

“Labour market weakness is now increasingly showing up in some of the ILO jobs data which had previously continued to show resilience – largely reflecting that this covers a three-month period and up to March had only included one week of the lockdown period. Having said that, the ILO data up to March had still looked surprisingly resilient given that the economy had contracted 2.2% quarter-on-quarter in the first quarter with economic activity disappointingly lacklustre over the first two months of the year and then falling 6.9% month-on-month in March.

“The ILO data show that the number employed fell 126,000 in the three months to May, which was the largest three monthly decline since 2011. This took the number employed down to 32.948 million from a record high of 33.114 million in the three months to March. The number employed had previously risen just 6,000 in the three months to April, which was down from 211,000 in the three months to March.

“The employment rate dipped to 76.4% in the three months to May from a record high of 76.6% in the three months to March.

“The number of unemployed fell 17,000 in the three months to May to be at 1.347 million; the unemployment rate remained at 3.9% in the three months to April. It is notable that ONS has indicated that furloughed workers will continue to count as employees, while those who claim from the Self-Employment Income Support Scheme will still be classed as self-employed.

“The fact that employment fell 126,000 but unemployment also dipped by 17,000 reflected the fact that the number of economically active people fell by 142,000 in the three months to May, taking the activity rate down to 79.6% from 79.8% in the three months to February.

“The number of job vacancies fell further to 333,000 in the three months to May, this was the lowest level since the series began in 2001 and down from 476,000 in the three months to May, 642,000 in the three months to April  and 818,000 in the three months to February.

“The ONS also reported that between March to May 2019 and March to May 2020, total actual weekly hours worked in the UK decreased by 175.3 million, or 16.7%, to 877.1 million hours. This was the largest annual decrease since estimates began in 1971, with total hours falling to its lowest level since May to July 1997.

Annual earnings growth falls, down year-on-year in May itself squeezing purchasing power

Howard Archer continues: “Annual earnings saw a further weakening in May and they look set to weaken further over the coming months. Many workers who were furloughed took only 80% of their normal pay from March. Looking ahead, many companies are looking to freeze or cut pay, and to reduce bonuses.

“Even before the downward impact on earnings from COVID-19, earnings growth had come well off the highs seen in mid-2019.

“Annual average earnings were down 0.3% in the three months to May; this was down from growth of 1.0% in the three months to April, 2.3% in the three months to March and 3.1% in the three months to January. It has come down from a peak of 3.9% in the three months July 2019, which had been an 11-year high.

“Annual earnings fell 1.2% in May itself after a drop of 1.0% in April; growth had previously slowed to 1.2% in March from 2.7% in February and 3.1% in January. It peaked at 4.0% in May 2019.

“Annual earnings are also being pulled down at the moment by reduced bonus payments compared to a year ago.

“Annual regular earnings growth (which strips out bonus payments which can be erratic and distort the overall figures) slowed to 0.7% in the three months to May; this was down from 1.7% in the three months to April; 2.7% in the three months to March and 3.1% in the three months to January. It has come down from an 11-year high of 3.9% in both the three months to July and June 2019.

“Annual regular earnings were flat in May itself, having edged down 0.1% in April; this is down from growth of 2.4% in March, 2.8% in February and January. It had peaked at 4.0% in June 2019.

“ONS data show that real earnings fell 1.9% year-on-year in May itself and were down 1.3% year-on-year in the three months to May. This contrasts with growth of 1.5% in the three months to January. Growth peaked at 2.0% in the three months to June 2019.

“Regular real earnings fell 0.7% year-on-year in May itself and were down 0.2% year-on-year in the three months to May.”