Unemployment falls, but higher inactivity is the cause again – EY ITEM Club comments

• The unemployment rate saw a decline in Q3, although this appeared to be because of another rise in inactivity. Falls in employment and job vacancies suggest that a weak economy is translating into softer demand for workers. 

• Meanwhile, pay growth stayed strong in cash terms, but was substantially negative after adjusting for inflation. On balance, the EY ITEM Club thinks today's data reinforce the odds of the Monetary Policy Committee (MPC) increasing rates again in December, but less markedly than in its meeting earlier this month.     

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The latest labour market data continued the pattern of recent releases, pointing to a jobs market still tight in absolute terms, but showing some signs of loosening. The Labour Force Survey unemployment rate stood at 3.6% in Q3, down from 3.8% in Q2, and the lowest since 1974. 

“However, the decline did not appear to be driven by a rise in the number of people in work, with employment falling 52,000 over the same period and the employment rate in Q3 remaining 1.1ppts below the immediate pre-Covid rate in Q4 2019. Instead, it was a further increase in inactivity that explained the lower jobless rate. This left the number of 16–64-year-olds not in work or actively seeking work at just under nine million, more than half-a-million higher than at the end of 2019.

“Adding to evidence of labour market tightness suggested by the latest unemployment and inactivity data was another strong reading for pay growth. Average total pay growth accelerated to 6% in Q3 from 5.2% in Q2, while regular pay rose 5.7% versus 4.8%. However, with CPI inflation running at 10% in Q3, the average employee's earnings fell considerably in real terms. Workers' bargaining power therefore still looks a long way from being able to generate a sustainable wage-price spiral. The odds of that happening are also expected to recede as the weak economy cuts demand for workers. 

“On that note, job vacancies fell further in the three months to October to 1.23 million, the lowest since autumn 2021. This, plus the fall in employment, suggests that a lack of GDP growth is starting to make a mark on labour demand, although vacancy numbers still slightly exceeded the number of unemployed, a very rare occurrence in the last 50 years. On balance, the EY ITEM Club thinks today's numbers are consistent with the MPC raising interest rates again in December. But the committee may rein back the scale of increase from November's 75bps to a more ‘conventional’ 50bps or 25bps rise.”