The UK labour market is seen tightening further towards the end of this year, but the rate of wage increases remains weaker, partly due to significantly low inflation and and slower-than-expected productivity growth.
The UK jobless rate is expected to have remained unchanged at 5.4% in the quarter to September, while jobless claims, a narrower and less distant gauge tracking labour market activity, is seen rising by around 1.4K between September and October. This would be down from the previous month's 4.6K increase, but significantly up when compared with the latest two years of sharp decreases in the number of social benefits claimants.
Increases in jobless claimants over the last two months suggest the UK jobs market continued to tighten, given the fact the number of people in the jobseekers' allowance scheme was falling on a monthly basis between November 2013 and May 2015 by an average of 27,300.
The rate of underlying wage growth, the one stripped of bonuses, is estimated to have decelerated again to 2.6% in the quarter to September, down from 2.8% a quarter before, while wages with bonuses are seen accelerating from 3% to 3.2%.
The Bank of England’s (BoE) latest forecast published within the November Inflation Report showed labor demand growth had remained robust in the UK, and both wage and productivity growth had picked up since last year, but remained below pre-crisis rates. The new forecasts also showed the BoE saw the jobless rate falling further to 5.3% in the fourth quarter of this year, then remain around that level throughout next year, before falling slightly to 5.2% in Q4 2016.
The latest estimates also suggested that "the long-term equilibrium unemployment rate could also be lower than judged."But "on the whole, the MPC judges that risks around the long-term equilibrium unemployment rate of 5% are broadly balanced, though there are a range of views among MPC members," the November Inflation Report read.
Nominal wages subdued
Wage growth has been one of the most significant variables the BoE has been focusing on while estimating domestically-generated inflationary pressures. Even though earnings have been picking up recently from the post-crisis lows, and with real earnings growth markedly helped by zero inflation, the level of nominal wage growth still remains below the pre-crisis levels.
A new CIPD survey showed UK pay growth was likely to remain significantly subdued over the course of the next year despite some other labor market watchers saying skills shortages were likely to push up on earnings. The CIPD survey showed that wage inflation was unlikely to take off due to limited skills shortages and subdued pay settlement forecasts from employers, partly driven down by significantly weak CPI inflation.
The survey further said that skills shortages had been reported in only 15% of current job vacancies as UK employers continued to be able to recruit the workers they need without significantly hiking wages, given Britain’s highly flexible labor market within the European Union jurisdiction.
"Many employers have heeded previous warnings of a tightening jobs market by providing more job opportunities for young people, including through apprenticeships, while up-skilling the existing workforce. At the same time, others are using migrant workers to strengthen their defense against a tightening labor market. This flexibility in the UK labor market seems likely to help contain significant wage inflation over the next 12 months," Gerwyn Davies, CIPD labor market analyst, said.
BoE uncertain about future wage growth
The annual rate of CPI inflation slipped 0.1% below zero in September as strong external deflationary forces continued to exert downward pressure on inflation in the UK, while domestically generated price pressures in the form of wages remain too weak to offset those external forces and push the overall inflation up towards the 2% target in the medium term.
At the November meeting of the BoE's Monetary Policy Committee (MPC), policymakers argued that "on the downside, the period of low inflation might be reflected in weaker wage pressures, especially in the near term. On the upside, the tightening in the labor market could result in greater pressure on pay."
Still, policymakers expect domestic cost pressures to "build as a result of a pickup in wage growth relative to productivity growth. CPI inflation is nonetheless expected to remain below 1% until the second half of next year, reflecting the continuing drag from commodity and other imported goods prices."
"Beyond that, the dampening influence of sterling’s past appreciation on inflation is expected to be persistent, diminishing only slowly over the MPC’s forecast period. In this context, the MPC judges it appropriate to return inflation to the target in around two years," policymakers argued.
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