Press release

13 Oct 2020 London, GB

UK unemployment rate up to 4.5% and looks set to rise further – EY ITEM Club comments

The latest labour market report is weak overall although there are some elements of improvement as the economy rebounded in Q3 as reduced restrictions allowed sectors to open up and more furloughed workers returned to work.

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Related topics Growth COVID-19
  • The latest labour market report is weak overall although there are some elements of improvement as the economy rebounded in Q3 as reduced restrictions allowed sectors to open up and more furloughed workers returned to work
  • The unemployment rate is now on an upward trend, rising to 4.5% in the three months to August as the number of people without jobs increased 136,000. Employment fell 153,000
  • However, Pay as You Earn Real Time Information data indicate that the number of paid employees in September was up 20,000 from August, although it was still down 673,000 from March. Claimant count unemployment rose by a reduced 28,100 in September to 2.7321 million. Consequently, claimant count unemployment was up 1.4916 million (120.3%) since March, when it stood at 1.2396 million
  • The number of job vacancies rose by a record 144,000 in the three months to September, after falling to a record low in the three months to June. There has also been appreciable recovery in total hours worked although they remain low by past norms
  • The impact of COVID-19 on the labour market has been substantially limited by companies’ ability to furlough workers under the Government’s Coronavirus Job Retention Scheme, which ends this month. While the Chancellor’s recent measures – the Job Support Scheme and the extension announced to protect jobs in firms forced to shut temporarily due to new COVID-19 restrictions – should have some limiting impact on the rise in unemployment, the EY ITEM Club predicts that they won’t be able to prevent an appreciable rise given the increased challenges and uncertainties facing the economy, led by increasing COVID-19 cases and renewed restrictions on activity
  • The EY ITEM Club suspects the unemployment rate will reach around 7.0% at the end of 2020, and a peak of 7.7% by mid-2021
  • Annual average earnings growth moved back into positive territory in August after declines since April influenced by the furlough effect
  • Nevertheless, earnings look set to remain limited. While workers coming off furlough should be restored to full pay, many companies are looking to freeze pay

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

“The latest labour market report is somewhat of a mixed bag. It is weak overall, but there were areas of improvement as the economy recovered during the third quarter from its record second quarter contraction. More sectors were open and more furloughed workers returned to work.

“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 9.6 million workers. According to the Bank of England, businesses reported 7% of employees had been furloughed in September, down from 12% in August, 18% in July and a peak of 36% in April.

“HMRC and ONS Pay as You Earn Real Time Information data indicate that the number of paid employees in September was up 20,000 from August, but was down 673,000 from March.

“Claimant count unemployment rose by a reduced 28,100 in September to 2.73123 million. This followed increases of 39,500 in August and 69,900 in July and was well below the peak increases seen in May (564,600) and, especially, April (852,900). September’s claimant count unemployment was up 1.4916 million (120.3%) since March, when it stood at 1.2396 million.

“However, there were increased signs of weakness in the Labour Force Survey (LFS) data, which have been subject to major revisions. The LFS data show that the number employed fell 153,000 in the three months to August to 32.591 million from 33.073 million in the three months to February. The employment rate stood at 75.6% in the three months to August, which was down from 75.9% in the three months to May and 76.6% in the three months to February.

“The number of unemployed people rose 138,000 in the three months to August to be at 1.522 million; this caused the unemployment rate to rise to 4.5% from a previously reported 4.1% in the three months to July and 3.9% in the three months to June. The revised data show that the unemployment rate stood at 4.1% in the three months to May and 4.0% in the three months to February.

“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 stopped up looking for work and are therefore no longer counted as unemployed. This has led to a rise in the inactivity rate.

“The number of job vacancies rose appreciably after falling to a record low in the three months to June: it was up to 488,000 in the three months to September from 436,000 in the three months to August, 38,000 in the three months to July and 343,000 in the three months to June, which had been the lowest level since the series began in 2001. It had been as high as 818,000 in the three months to February.

“The ONS also reported that between March to May 2020 and June to August 2020, total actual weekly hours worked in the UK saw a record increase of 20.0 million, or 2.3%, to 891.0 million hours. Average actual weekly hours worked saw a record increase of 0.7 hours on the quarter to 27.3 hours. Nevertheless, total hours worked are still at a low level compared to past norms.”

Unemployment rate likely to reach a peak around 7.7%

Howard Archer continues: “The latest support from the Treasury for the labour market and businesses has led the EY ITEM Club to trim its expectation of how much unemployment will rise over the coming months.

“Nevertheless, the EY ITEM Club still suspects that, given the vulnerable position of many companies and an uncertain outlook, plus the fact that employers will have to contribute significantly to the pay of the workers that are working part-time, unemployment will rise significantly when the furlough scheme ends in October. It could also see a further, albeit less marked increase when the Job Support Scheme concludes at the end of April 2021.

“The EY ITEM Club suspects the LFS unemployment rate will reach around 7.0% around the turn of the year, and reach a peak of 7.7% by mid-2021 before stabilising and then starting to fall back. The unemployment rate is also likely to be lifted by a workers starting to look for jobs again as the economy recovers.”

Annual earnings growth back into positive territory in August, although purchasing power still squeezed

Howard Archer continues: “Annual earnings growth moved back into positive territory in August itself after falls during April-July as more workers returned from furlough. Workers who were furloughed took only 80% of their normal pay from March.

“Pay looks set to remain limited. While workers coming off furlough should be restored to full pay, many companies are looking to freeze or cut pay, and to reduce bonuses. 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 rose 1.9% in August itself after falls of 0.3% in July, 1.6% in June, 1.2% in May and 1.0% in April; they were flat year-on-year in the three months to August compared to a maximum fall of 1.2% in the three months to June.

“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 1.7% in August, after an increase of 0.9% in July; this followed marginal declines over the previous three months: June (0.2%), May (0.2%) and April (0.1%). Consequently, annual regular earnings growth was up 0.8% in the three months to August; there had been a fall of 0.1% in the three months to June.

“ONS data show that real earnings rose 1.4% year-on-year in August itself after declines of 1.4% in July and a 2.3% fall in June; they were down 0.8% year-on-year in the three months to August. This contrasts with growth of 1.5% in the three months to January.

“Regular real earnings rose 1.2% year-on-year in August itself and were up 0.1% year-on-year in the three months to August.”