Press release

23 Feb 2021 London, GB

UK labour market shows resilience as unemployment rate edges up to 5.1% – EY ITEM Club comments

UK labour market shows resilience as unemployment rate edges up to 5.1% – EY ITEM Club comments

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  • The latest labour market data continue to show a fair degree of resilience, indicating that the extension of the furlough scheme to the end of April is having a significant limiting impact on job losses
  • The number of unemployed people rose by 121,000 in the three months to December, while the unemployment rate edged up to 5.1% – the highest since early 2016. Employment fell 114,000. HMRC and ONS Pay as You Earn Real Time Information data indicate that the number of paid employees in January was up 83,000 from December
  • The extension of the furlough scheme should continue to limit pressure on the labour market through Q1 2021 as the economy looks headed for clear contraction amid lockdown
  • The EY ITEM Club believes it is likely that the Chancellor will extend the furlough scheme again in the Budget on 3 March
  • The EY ITEM Club has been expecting the unemployment rate to reach a peak of 7.0% around Q3 2021. However, the current ongoing resilience of the labour market, the likely extension of the furlough scheme and the prospect of decent recovery developing from Q2 is increasing the prospect that the unemployment rate could peak below 7%.There is a growing possibility that the unemployment rate may not get much above 6%
  • Annual average earnings growth continued its recent upward trend, reaching 4.7% for total pay in the three months to December and 4.1% for regular pay. However, the ONS has indicated that this is influenced by the fall in the number and proportion of lower paid jobs during the pandemic and that, allowing for this, annual earnings growth is likely to be around 3%

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

“While weaker, the latest labour market data show a fair degree of ongoing resilience, indicating that the extension of the furlough scheme to the end of April is having a significant impact in limiting job losses. The labour market would likely have come under appreciable pressure in the final quarter of 2020 from increased restrictions on activity, including the English lockdown in November, although the economy still grew 1.0% quarter-on-quarter.

“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. Latest ONS data show that the number of workers on full or partial furlough rose to 20% during 25 January to 7 February, up from 18% during the previous two weeks.

“The EY ITEM Club had been expecting the unemployment rate to reach a peak of 7.0% around Q3 2021. However, the current ongoing resilience of the labour market, the likely extension of the furlough scheme and the prospect of decent recovery developing from the second quarter supported by the rapid roll-out of the COVID-19 vaccines is increasing the prospect that the unemployment rate could well peak below 7%. Indeed, there is a growing possibility that the unemployment rate may not get much above 6%.”

Key statistics from today’s data

Howard Archer continues: “The Labour Force Survey (LFS) data show that the number of people in employment fell 114,000 in the three months to December to 32.393m. The fall in employment had previously slowed to 88,000 in the three months to November from 144,000 in the three months to October and 164,000 in the three months to September. Employment had been at a record high of 33.073m in the three months to February 2020. The employment rate stood at 75.0% in the three months to December, which down from 75.2% in the three months to November, 75.3% in the three months to September, 75.6% in the three months to August, 75.9% in the three months to May and 76.6% in the three months to February.

“Meanwhile, redundancies slowed to 343,000 in the three months to December from a record high of 395,000 in the three months to November. 

“The number of unemployed people rose 121,000 in the three months to December to be at 1.744m; this was less than the increases of 202,000 in the three months to November, 241,000 in the three months to October and 243,000 in the three months to September. This caused the unemployment rate to edge up to 5.1% in the three months to December - the highest since March 2016 - from 5.0% in the three months to November, 4.9% in the three months to October, 4.8% in the three months to September, 4.5% in the three months to August, and 4.1% in the three months to June. The unemployment rate stood at 4.0% in the three months to February 2020. 

“The number of job vacancies rose further after falling to a record low in the three months to June: this figure was up to 599,000 in the three months to January from 590,000 in the three months to December, 558,000 in the three months to November 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 2020. 

“The ONS also reported between July to September 2020 and October to December 2020, total actual weekly hours worked in the UK increased by 53.7m, or 5.8%, to 978.7m hours. 

“HMRC and ONS Pay as You Earn Real Time Information data indicate that the number of paid employees in January was up 83,000 from December, but was down 726,000 since February 2020.

“Claimant count unemployment fell by 20,000 in January to 2.5965m after a fall of 20,400 in December. Claimant count unemployment had previously risen to a peak of 2,7031m million in August from 1.2396m in March.”

Annual earnings growth strengthened in December; pay growth likely to be limited going forward

Howard Archer adds: “Annual earnings growth strengthened in December, increasing the firming trend of recent months after weakness earlier in 2020.

“Annual average earnings climbed to 5.4% in December itself from 4.8% in November, 3.8% in October, 2.6% in September and 2.0% in August. This followed falls of 0.2% in July, 1.5% in June, 1.2% in May and 1.0% in April. Earnings were up 4.7% in the three months to December.

“Annual regular earnings growth - which strips out bonus payments, which can be erratic and distort the overall figures - rose 4.5% in December itself, up from 4.2% in November, 3.6% in October, 2.9% in September, 1.9% in August and 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 4.1% in the three months to December.

“Significantly, the ONS has reported that current average pay growth rates are being pushed upwards by a decline in the number and proportion of lower paid jobs compared with before the coronavirus pandemic. The ONS estimates that underlying wage growth – if the effect of this change in profile of jobs is removed – is likely to be around 3%.

“Looking ahead, the EY ITEM Club suspects that earnings will be limited over the coming months by many companies looking to freeze pay or hold down pay increases to limit their costs in still challenging conditions.”