UK Labour Market: Reading the Runes
By John Hawksworth, Chief Economist
After a period last year when unemployment started rising again, the latest published data from the Office for National Statistics (ONS) on 18 April brought some welcome news of a small fall in the headline unemployment rate to 8.3% in the three months to February 2012, down from 8.4% in the previous three months. As always with economics statistics, however, the detailed data revealed a more complex and mixed picture (the release itself runs to 50 pages) so it is worth taking a closer look at this data since it offers one of the best indicators of what is going on in the UK economy.
1. Total employment up, but full-time employment down
The total number of people employed in the UK rose by 53,000 to 29.17 million in the three months to February 2012 relative to the previous three months. This still left it 57,000 lower than a year earlier, but almost half of the losses over the previous nine months have been clawed back, which is clearly good news.
On closer inspection though, this rise of 53,000 was driven by a rise of 80,000 in part-time employment (particularly in the administrative and support services and hotel and catering sectors) while full-time employment fell by 27,000. Based on a rule of thumb that a part-time job has around half the average hours of a full-time job, the net increase in full-time equivalent employment was only around 13,000. Still a positive trend but significantly lower than the 53,000 headline figure. The number of people working part-time because they could not find a full-time job rose to 1.4 million – the highest since comparable records began in 1992.
2. Total unemployment down, but long-term unemployment up
Total unemployment on the Labour Force Survey (LFS) measure fell by 35,000 to 2.65 million in the three months to February 2012 compared to the previous quarter and youth unemployment also fell by 13,000, which was a particularly welcome development after the sharp rises seen last year. The claimant count measure of unemployment did rise slightly in March, but the pace of increase has slowed significantly since last autumn and this is generally a less reliable indicator than the LFS measure as it is influenced by changes in benefit rules.
But here too there is a caveat: the number of people out of work for more than a year rose by 26,000 to 883,000. This is of particular concern as those unemployed for more than a year are much more likely to become detached from the labour market, losing confidence and employability with severe detrimental effects on their long-term career prospects. This may just be a lagged effect of past high inflows into the unemployment pool, but for now it is still a matter of concern and a priority for policy to help these people back into the labour market as soon as possible.
3. Earnings growth still subdued but unit labour costs rising
Average earnings growth excluding bonuses (which tend to be volatile) fell further to 1.6% in the three months to February and remains well below consumer price inflation of around 3.5%. This continued decline in real wages is a negative for consumer spending and the businesses that depend on it, but it does at least help to protect jobs. This has been a persistent feature of recent years and helps to explain why unemployment rates have not reached the double digit levels seen in the past two UK recessions.
However, the price of keeping employment up through real wage declines has been a lacklustre performance for productivity growth relative to past economic cycles. As a result, unit wage cost inflation has actually been increasing, which together with higher oil prices recently, could feed through later into increased inflation. This is something the Bank of England Monetary Policy Committee will want to keep a careful eye on since, if the economy does recover later this year and into 2013, firms may seek to rebuild profit margins by raising prices, even if a weak economy has restrained their ability to do this so far.
In conclusion, rising headline employment and falling headline unemployment support the message from business surveys of a gradual UK economic recovery since December, but the detailed data remains mixed and there is still a long way to go before we can be really confident that unemployment has peaked in this cycle.
Contact: John Hawksworth | Tel: +44 (0)20 7213 1650
