Press release

15 Sep 2020 London, GB

UK unemployment rate starts to edge up – EY ITEM Club comments

The latest labour market report is a mixed bag and still weak overall, but there are areas of improvement. More furloughed workers returned to work, employment fell at a reduced rate, but the unemployment rate started to rise.

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Related topics Growth COVID-19
  • The latest labour market report is a mixed bag and still weak overall, but there are areas of improvement. More furloughed workers returned to work, employment fell at a reduced rate, but the unemployment rate started to rise. The decline in earnings growth moderated after falls over the previous three months. Total hours worked fell at a reduced rate but still significantly
  • Claimant count unemployment rose by 73,700 in August to 2.7373 million. Claimant count unemployment was up 1.4977 million (120.8%) since March when it stood at 1.2396 million
  • HMRC and ONS Pay as You Earn Real Time Information data indicate that the number of paid employees in August was down 30,000 from July and was also down 695,000 (2.4%) from March
  • The ILO data showed a fall of just 12,000 in the number employed over the three months to July, which was a much smaller fall than 220,000 over the three months to June. Additionally, at 32.979 million in the three months to July, employment was up from 32.948 million in the three months to June, although it was still below the record high of 33.114 million in the three months to March
  • The ILO data also showed the number of unemployed rose 62,000 in the three months to July to be at 1.392 million; the unemployment rate rose modestly to 4.1% having been stable at 3.9% since March. The ONS has indicated that the unemployment rate has been kept down while employment fell because some people had stopped looking for work and are therefore no longer counted as unemployed. This has led to a rise in the inactivity rate
  • The ILO data showed the rate of decline in annual earnings moderated in July after weakening over the previous three months, influenced by the furlough effect. Annual average earnings edged down 0.1% in July after a drop of 1.6% in June; they were down 1.2% year-on-year in the three months to July. Even so, the recent increased squeeze on workers’ purchasing power was highlighted by real earnings growth falling 1.2% year-on-year in July itself and being down 1.8% year-on-year in the three months to July
  • Earnings look set to remain limited. While workers coming off furlough should be being restored to full pay, some companies may be looking to freeze or cut pay, and to reduce bonuses
  • The COVID-19 impact on the labour market has been substantially limited by companies’ ability to furlough workers, but this scheme started to be tapered in August and will end in October. There is a risk that unemployment may rise further once the furlough scheme ends in October and the scheme’s end may have influenced companies’ decisions on redundancies over the last couple of months
  • 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 and for limiting any further impact that as many jobs can be saved as possible
  • The EY ITEM Club suspects that the Chancellor will feel compelled to take further steps to support the labour market in the Autumn Budget
  • The EY ITEM Club expects is that the ILO unemployment rate will reach around 8.5% in late-2020/early-2021 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 latest labour market report is somewhat of a mixed bag, and still weak overall, but there were areas of improvement as the economy increasingly opened up and more furloughed workers returned to work. Employment fell at a reduced rate, but the unemployment rate finally started to rise. Meanwhile, the decline in earnings growth moderated after significant falls over the previous three months. Total hours worked fell at a reduced rate but still notably.

“The pandemic’s impact on the labour market has been substantially limited by companies’ ability to furlough workers under the Government’s Coronavirus Job Retention Scheme. Data from the Treasury shows that the job retention scheme has covered 9.4 million workers. However, ONS data suggest that the share of private sector employees who are on furlough has fallen from around 30% of the private sector workforce in May to around 11% by late-August.

“Claimant count unemployment rose 73,700 in August to 2.7373 million. This followed an increase of 94,400 in July. There had been particularly large increases in May (566,400) and, especially, April (852,900). Consequently, claimant count unemployment was up 1.4977 million (120.8%) since March when it stood at 1.2396 million.

“HMRC and ONS Pay as You Earn Real Time Information data indicates that the number of paid employees in August was down 30,000 from July and was also down 695,000 from March.

“The ILO data show that the number employed fell just 12,000 in the three months to July, which was a much smaller fall than 220,000 over the three months to June. This had been the largest three-monthly decline since the three months to July 2009. In addition, at 32.979 million in the three months to July, employment was actually up from 32.948 million in the three months to June, although it was still below the record high of 33.114 million in the three months to March.

“The employment rate rose back up to 76.5% in the three months to July after dipping to 76.4% in the three months to June from a record high of 76.6% in the three months to March.

“The number of unemployed rose 62,000 in the three months to July to be at 1.398 million; this caused the unemployment rate to rise to 4.1% having defied previous expectations of an increase by remaining at 3.9% since the lockdown was imposed in March. It is notable that the ONS has indicated that furloughed workers continue to count as employees, while those who claim from the Self-Employment Income Support Scheme will still be classed as self-employed. The ONS has also indicated that the unemployment rate has been kept down while employment fell as a number of people had given up looking for work and are therefore no longer counted as unemployed. This led to a rise in the inactivity rate.

“The number of job vacancies continued to move back up modestly after falling to a record low: it was up to 434,000 in the three months to August from 370,000 in the three months to July and 333,000 in the three months to June, which had been the lowest level since the series began in 2001. It was still 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 February to April 2020 and May to July 2020, total actual weekly hours worked in the UK decreased by 93.9 million to 866.0 million hours. Average actual weekly hours fell by 2.8 hours on the quarter to 26.3 hours.”

Decline in annual earnings slows, although purchasing power still squeezed

Howard Archer continues: “The decline in annual earnings slowed in July after recent significant falls. Many workers who were furloughed took only 80% of their normal pay from March. While workers coming off furlough should be being restored to full pay, some companies may be looking to freeze or cut pay, and to reduce bonuses. Nevertheless, pay looks set to remain limited.

“The Chartered Institute of Personnel and Development (CIPD) reported in August that two-fifths of private sector employers planned to freeze pay for the next 12 months. The median expectation of pay growth was just 1%.

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

“Annual average earnings edged down 0.1% in July itself after drops of 1.6% in June, 1.2% in May and 1.0% in April; they were down 1.2% year-on-year in the three months to July.

“Annual earnings figures 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) rose 0.9% in July, after marginal declines over the previous three months: June (0.2%), May (0.2%) and April (0.1%). Consequently, annual regular earnings growth edged up 0.2% in the three months to July after a drop of 0.2% in the three months to June.

“ONS data shows that real earnings fell 1.2% year-on-year in July itself, which was nearly half the 2.3% fall in June; they were down 1.8% year-on-year in the three months to July. 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 0.2% year-on-year in July itself and were down 0.7% year-on-year in the three months to July.”