Recent employment statistics tell an uncertain story of recovery as unemployment falls along with average wages
The Office of National Statistics has released quarterly figures showing that the UK unemployment rate has fallen to 6.4%, a decline of 437,000 on the year. With 2.08 million people aged 16 and over seeking work, unemployment currently stands at its lowest level since late 2008. The claimant count also fell by 34,000 from last month to the lowest number since September 2008. However, despite encouraging signs of a full-fledged economic recovery there are indicators that all is not well in the labour market; average weekly wages have fallen by 0.2% compared to last year, the first time since 2009.
The ONS has advised that wage figures may have been distorted by widespread deferral of bonuses to take advantage of the 5% cut on the top rate of income tax introduced last year; indeed excluding bonuses average weekly wages have seen an annual growth of 0.6%.
Nevertheless, sluggish wage growth is still a cause for concern. As the Bank of England cut its wage growth forecast in half (from 2.5% to just 1.25% for 2014) Governor Mark Carney stated that despite ‘robust growth’ in the UK wage figures indicate there is still spare capacity to be absorbed by the economy. This in turn will impact on the Monetary Policy Committee’s decision regarding the interest rate, although Carney admitted that a ‘tremendous uncertainty’ hung over the amount of spare capacity that remained. He further stated that a lower productivity forecast is a function of the amount of cheap labour still available to firms, which is discouraging investment in capital.
The MPC certainly have their work cut out for them; the current 0.5% interest rate, static since March 2009, seems due a rise but a climate of rising unemployment coupled with minimal wage growth presents the committee with a frustratingly opaque picture of the British economy.
The political reaction to the new statistics evidences that it isn’t quite the story either side wanted. W&P secretary Iain Duncan Smith declared that “the government’s long-term economic plan to build a stronger economy and a fairer society is working”, with Danny Alexander offering a more tempered opinion, stating “there is still a long way to go”. In the Labour camp shadow employment minister Stephen Timms was petrified, calling the wage figures “extremely worrying”.
Inevitably, the ‘shock’ revelation of ‘falling’ wages has drawn the most comment. The ONS’s assertion that this is partly due to deferred bonuses seems plausible, but glosses over less superficial factors. Duncan Weldon, Newsnight’s economics correspondent, has pointed to a ‘compositional change’ in the labour force; more people are working but are doing so in lower-wage sectors. Governor Carney’s argument that wage growth will pick up once spare capacity in the economy is exhausted seems to be another piece of the puzzle. More importantly it will serve as a fantastic real-world example for Economics 101 professors to seize upon come September (students at Russell Group universities will be more likely to hear a story from their professor’s holiday in Cordoba).
It does seem slightly premature to begin seeking out a fundamental underlying trend that is forcing wages ever-downwards. Are new Gender Studies students instigating longer and more visceral arguments on Tumblr, causing people to spend less time working thus lowering productivity? We’ll have to wait and see.