The correlation between labour market productivity and wage growth has become one of the primary variables for the Bank of England to gauge domestically generated inflationary pressures. The latest figures show that both variables continue to show a mixed performance, but the signs of tentative improvement are eventually coming out.
According to the latest labour market data, regular wages - those showing a more underlying growth stripped of volatile bonus payments - continued to increase by 2.8% over the quarter to June, which was the highest rate of growth since 2009. Total earnings, including bonuses, dropped unexpectedly to 2.4% in June from 3.2% a month before, but this sudden drop was mainly due to the fact that the bonus season was over at the time of June's data collection.
Productivity growth offered a rather mixed picture. June's labour market statistics estimated employees worked 0.2% fewer hours during the second quarter, while the economy picked up by a healthy 0.7%. This may suggest an increased level of productivity when compared with the previous quarter, but the hours worked in the second quarter were also 1% above the level seen during the same quarter a year ago, when the economy rose as much as 1%. The latest available labour market productivity data are from the first quarter of this year. Those rather backward-looking figures showed productivity, as measured by output per hour, grew by 0.3%, and were 1.3% higher than the same period in 2014 - the fastest annual growth since Q1 2012.
Rising productivity growth is essential for more sustainable economic growth without the risk of stoking any significant inflationary pressures stemming primarily from increased labour costs. The more the workers are productive the less pressure there is on employers to raise margins in order to increase pay awards. If productivity was to deteriorate while the labour market continued to tighten, and wages rose, then the inflationary pressures would build up significantly, putting the Bank of England (BoE) under more pressure to tighten monetary policy more briskly in order to avoid inflation overshooting the target in the medium-term.
In one of her recent interviews with media, BoE Deputy Governor Nemat Shafik said the path of the BoE's base interest rate would be determined by the correlation between wage growth and productivity.
"If wage increases are expected but productivity is performing well we can wait for longer [with rate hike]; if those wage increases are not accompanied by productivity increases then I think we will have to move more quickly on rates because inflationary pressures will build up...I think that’s the key choice that we face," Shafik explained.
Productivity growth has been significantly subdued since the 2008 financial crisis and has not recovered to the pre-crisis level as yet. In its August Inflation Report forecasts, the BoE estimated that "productivity growth was 0.8% and is expected to have been 1.5% in the four quarters to Q2. While this marks a considerable strengthening compared to the past few years, it is still weaker than its pre-crisis average rate of 2.4%."
The BoE has been cautiously watching over the above mentioned variables as these are, apart from external forces, among the most fundamental data defining the future path of the UK monetary policy. In his speech during the August Inflation Report, BoE Governor Mark Carney said: "the MPC will monitor developments relative to the forecast in particular wage growth, productivity, core inflation, import prices and risks to the international environment," while reiterating that "the path of rates is much more important than the precise timing of the first increase."
The UK labour market also appears to have been levelling off after years of a sharply falling jobless rate. The jobless rate remained unchanged at 5.6% in June, notably down from 7.8% in the same quarter in 2013. Commenting on the June jobs data, the Office for National Statistics' David Freeman said "this is now the second consecutive time we've reported fewer people in work on this quarter. While it's too early to conclude that the jobs market is leveling off, these figures certainly strengthen that possibility. Growth in pay, however, remains solid."
The BoE's estimate for the equilibrium jobless rate, the lowest possible sustainable rate that does not stoke inflationary pressure, is around 5%. So there is still some scope for the rate to fall without increasing inflationary risks. But the figures on the jobless claims change show the rate may be nearing its bottom. A sudden increase in jobless claimants in June (the first in two years) suggested the jobs market continued to tighten markedly, given the fact the number claimants was falling on a monthly basis by an average of 27,300 between November 2013 and May 2015.
Disclaimer: The information provided by WBP Online come from its Reporters and Foreign Correspondents and its third party suppliers ("Information Providers"). WBP Online believes its text services to be reliable, but accuracy is not warranted or guaranteed. This includes facts, views, opinions and recommendations of individuals and organizations deemed of interest.
Neither WBP Online nor Information Providers guarantees the accuracy, completeness or timeliness of, or otherwise endorses, these views, opinions or recommendations, gives investment advice, or advocates the purchase or sale of any security or investment.