Strength in labour market figures, but a disinflationary outlook from the Bank

The monthly figures show positive real earnings for the first time since 2009.

The monthly figures show positive real earnings for the first time since 2009

For the fifth quarter in a row, employment rose and unemployment fell. The employment rate at 73 per cent remains at its pre-crisis peak, though the 6 per cent unemployment rate is still above the rate of 5.2 per cent ahead of the crisis, amounting to around 300,000 jobs.

Over recent months the TUC have argued that these gains should be set against the huge scale of underemployment and the prolonged falls in real earnings. Since the start of the crisis there have been significant changes to the composition of the labour market, with a greater role for part-time work, and very large increases in the numbers of self-employed. These trade-off against a reduced role for employees in full-time work.

Only over the latest two quarters has this tendency been arrested, with employment in full-time employee posts more than accounting for the overall change in jobs. In a majority of the other quarters since the coalition took office, the majority of newly-created posts have been part time and/or self-employed.

Change in employment, quarter compared with previous quarter, thousands

Unemployment stats Novj

Over the whole period since May 2010, around half of new jobs have been full-time employee posts, and the other half self-employed and part-time. But, as above, compared with the pre-crisis peak, there has been no gain in full-time employee posts, when historic proportions would have meant a rise of around 625,000.

Lastly here, it is also notable from the chart that the overall rate of increase in employment in the latest two quarters is down from the headier figures at the turn of the year.

The weakness in real earnings figures is now almost universally understood, undoubtedly because people feel it in reality. TUC analysis has shown the post-crisis period to be the longest period of falling real earnings on record. The latest (September) figures show average weekly earnings up 1.3 per cent on a year ago; this is marginally ahead of the September CPI at 1.2 per cent.

Directly comparing these two annual rates, the monthly figures show positive real earnings for the first time since 2009. But as the Labour Party observed, “there is a huge amount of lost ground to catch up”. The AWE figure remains in territory that is normally unchartered; before this year, annual AWE growth had been below 1 per cent only once in the post-war period, and that was at the depths of the ‘great recession’ in 2009. The CPI figure is at its lowest for five years, by a good margin.

The obvious question is whether the labour market is beginning to normalise, to move away from this reliance on underemployment and falling earnings. Most obviously, such a notion runs against sentiment, with a recent ‘populus’ survey showing only one in seven feeling any benefit from any revival in economic activity.

At today’s November Inflation Report press conference, however, the governor of the Bank of England argued that “the economy will continue on its path towards normalisation”. And he observed “the first tentative signs of the long-awaited pick up in wage growth” (though in questions cautioned that “one swallow doesn’t make a summer”).

But these remarks were made against the backdrop of a very downbeat assessment of global prospects, with indicators “moribund”.

And while relatively upbeat on UK domestic demand, the prospects for UK nominal earnings growth were basically unchanged from their last assessment (though down marginally in 2015). Improved gains to real earnings were therefore driven only by fairly significant downward revisions to the inflation forecast, reflecting in part global conditions, but also low growth in unit wage costs and hence feedbacks from recent earnings outcomes.

The Bank now expect on the balance of probabilities to be writing to the chancellor in the next few months explaining below 1 per cent inflation. Moreover, in spite of downward revisions to inflation, real household post-tax income growth was shaved down by a quarter a percentage point in both 2014 and 2015, to 1½ and 1¼ per cent respectively.

These disinflationary conditions remain a non-trivial matter, and progress to normalisation is far from guaranteed. Though plainly not everybody is powerless in this.

Geoff Tily is a senior economist at the TUC

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