Data from the Office For National Statistics suggests that UK wage growth has eased from 2.8% to 2.7% in the three-month period to May. This is despite a fall of 12000 in the official unemployment level, reducing it to 1.41 million (however, the figure is based on an estimate and the level of sensitivity is about ten times higher at 100000, being the level of job changes required to be accurately determined – details, eh?). The official unemployment rate stands unchanged at 4.2% which is its lowest recorded value since 1975.
Many economists think that unemployment below 5% represents full employment, but, of course, that depends on how you define “unemployed”. To be counted in the statistics, an unemployed person needs to be registered as unemployed and actively seeking work – currently, this description applies to 4.2% of the workforce. It ought to mean that employers need to offer better conditions to attract and retain staff, so one would predict that wage inflation should become a factor. It hasn’t so far – this might imply that “practical unemployment” is higher than the statistics suggest, meaning that employers can draw from a larger pool of people looking for work.
Wage growth is an index that the MPC considers when setting interest rates, so some see the latest data as weakening the chances for an August interest rate hike. When taking bonuses into consideration, wage growth dipped from 2.6% to 2.5%.
The senior economist at the Institute of Directors, Tei Parikh sounded a cautious not on rate rise chances following the figures for wages increase: "Clamour for an August interest rate rise has been building, but the sluggish pay growth should give pause for thought. The Bank should pay heed to the array of obstacles standing in the way of firms, from the burden of business rates to Brexit uncertainty, when it comes to making its decision."
The conclusions of Suren Thiru, head of economics for the British Chamber of Commerce was equally cautious: "This means that earnings growth in real terms remains in positive territory by just a small margin and so is unlikely to provide much of a boost to consumer spending power. While we expect that interest rates will rise sooner rather than later, with earnings growth underwhelming, there remains sufficient scope for the MPC to keep a rates hike on hold for longer, particularly given the current economic and political uncertainty."