The weakness of the wider economy is catching up with the labour market

Whilst important not to read too much into one set of figures, it may now be the case that the weakness of the wider economy is catching up with the labour market.

Today’s labour market statistics make for grim reading. For much the past year the labour market has appeared to defy gravity, with employment growing and unemployment falling despite a stagnant economy.

Whilst important not to read too much into one set of figures, it may now be the case that the weakness of the wider economy is catching up with the labour market.

Today’s statistics are unreservedly bad. Unemployment rose by 70,000, youth unemployment rose by 20,000 and long term unemployment increased with the number of people out of work for over two years up by 28,000.

The unemployment rate (using the ILO measure) rose to 7.9 per cent, up from 7.7 per cent in the previous period. This is broadly in line with what forecasters are expecting – the OBR for example expect unemployment to rise in 2013 and 2014 and not begin falling until 2015.

In reality of course despite the labour market often being hailed as good news there have been worrying underlying trends for most of the past year – most notably falling real wages. This trend accelerated in the most data.

Average weekly earnings growth (including bonuses) fell to just 0.8 per cent in February, just one quarter of the level of RPI increases (3.2 per cent). Average weekly regular pay (i.e. excluding bonus payments) fell to just 1.0 per cent – the lowest since the series began in 2001.

The chart below shows RPI, average weekly earnings (including bonuses) and real wages since 2001.

Average weekly earnings

As can be seen workers’ income has been being squeezed consistently squeezed since late 2009.

In the first half of 2012, falling inflation offered workers some relief and the pace of decline of real wages began to lessen. By last September, real wages were falling at an annual rate of -0.8 per cent – still a bad outcome but much better than what was experienced in 2010 and 2011.

Since then the pace of decline has picked up again and, as of February, real wages were falling at a rate of -2.4 per cent. The pickup in the rate of real wage falls is being driven more by slower earnings growth than by rising inflation. RPI inflation has increased by 0.6 percentage points since September whilst earnings growth has fallen from 1.8 per cent to 0.8 per cent. Two thirds of the extra pressure on real wages in the past six or so months has come from weak earnings growth rather than rising prices.

Falling household incomes, alongside fiscal austerity, tight credit conditions and the impacts of the Eurocrisis, are all adding to a major demand crisis in the economy. Yesterday the IMF urged George Osborne to think again about the pace of his spending cuts given what they described as ‘lacklustre demand’. Today’s figures suggest that our demand problem is getting a lot worse.

One Response to “The weakness of the wider economy is catching up with the labour market”

  1. OldLb

    How many tens of thousands are down to Labour?

    You raised the retirement age for women, and the end result its lots are looking for work.

    Ah yes, we can’t mention problems we’ve caused.

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