UK Employment Data

The latest figures from the ONS indicate that for the three months to December 2014, UK employment rose, to 73.2% of the available workforce, whilst unemployment fell to 5.7%. Meanwhile wages including bonuses rose by 2.1%, and by 1.7% excluding bonuses.  Meanwhile, CPI inflation has fallen to 0.3%, with RPI at 1.1%.  However, this data cannot be taken at face value.

The fact that a great deal of the employment is comprised of workers forced on to zero hours contracts, trapped in low paid, low status part-time, and temporary work, and that many of the people counted as "employed", who are in self-employment, are people who could not find decent full-time employment, and have become trapped in low status, low paid self-employment, has been discussed extensively.

What all of these factors demonstrate, and explain, is the fact that UK productivity is very low, and getting worse.  Productivity in Britain is only about 80% of what it is in France.   This is a problem for Britain, and a problem for the Bank of England.  Employment has been rising, and unemployment falling, because even with relatively small amounts of growth in the economy, the number of workers required to perform this work increases proportionately more than in economies where productivity is higher.  But, the consequence is that the workers then employed can only be paid lower wages.  It is the economic model of low wages, low productivity, and high levels of private debt that was put in palace by Thatcher in the 1980's, and out of which the UK economy has been unable to escape ever since.  It means that the UK will continue to suffer relative economic decline.

The reason it poses a problem for the Bank of England, is that as unemployment falls, firms will begin to need to bid up wages for workers, and with low levels of productivity that will squeeze profits.  To restrict the rise in wages, the Bank of England will need to raise interest rates, at a time when global interest rates are in any case rising.  But, low levels of productivity, and squeezed profits are not an environment, in which the UK economy is likely to respond well to those higher interest rates.  The only immediate respite may be that the rise in interest rates will burst the various asset price bubbles.

If the bubble in house prices bursts, that will be a further boon to workers, similar to the fall in oil prices, as it will make the cost of buying shelter much cheaper.  It will also make the cost of buying pension provision cheaper, as the price of shares and bonds falls, whilst increasing the yield on those bonds and shares, so causing pension revenues to rise.

The ONS data, should also be treated with caution for a further reason.  It covers the three month period of October to december 2014.  The ONS's own monthly data, indicates that economic inactivity rates during 2014 were rising.  It also shows that for December, the employment rate was down by 0.2%.

As set out in previous posts, the UK economy was set to turn down sharply in the last quarter of 2014, as the three year cyclical slow down kicked in, and that has indeed been seen in the GDP, and other survey data for the last few months.  That slow down is unlikely to have yet been reflected in employment and wage data, which are lagging indicators.