World Business Press Online

The UK labor market has been tightening briskly in recent quarters, while productivity and real wage growth remain well below pre-crisis levels.

The UK economy is getting back to normal. Although still fragile, economic output has been rising at the fastest pace among the seven advanced economies and the labor market has been tightening sharply since last summer. However, what is still hampering more sustainable, long-term, growth is weak productivity and meager wage growth - the puzzle keeping Bank of England (BoE) policymakers busy in recent months.

The jobless rate has decreased surprisingly sharply from 7.7% in August last year down to 6.5% in May. In the quarter to June, the unemployment rate is estimated to have fallen further to 6.4%, while the claimant count rate is expected to have dropped to 3%.

Both the pace of the jobless decreasing and the number of employed people within the whole of the economy have surprised policymakers. But weak productivity and meager wage growth have been sending waves of uncertainty and caution about whether the current pace growth is sustainable in the long run.

According to the latest official data, total pay rose by a mere 0.3% in May, the lowest wage growth since March to May 2009, while pay excluding bonuses rose only 0.7%, the lowest since Office for National Statistics (ONS) records began in March 2001.

Not much of an improvement is expected in June. Market estimates suggest average weekly earnings, excluding bonuses, to have remained flat and risen by 0.7%, which would be the lowest on record again. As for total pay, the rate is expected to have declined 0.1%, down from growth of 0.3% a month before. The current weak wage growth compares with a 4.1% rise in earnings during the pre-crisis peak in January 2008.

The weak wages dilemma has also been one of the factors keeping BoE policymakers cautious about raising the base interest rate sooner. BoE policymakers will be closely watching the official wage growth and jobless rate data this month and will present new forecasts in their quarterly Inflation Report (IR) due on August 13, coinciding with the labor market data.

BoE Governor Mark Carney recently said that a key judgment for the Monetary Policy Committee (MPC) will be to gauge when and to what extent the labor supply and spare capacity tightening will translate into real wage growth, and in turn wage growth into price pressures.

In its latest report, the Chartered Institute of Personnel and Development (CIPD), an influential HR body, said employers and policymakers need to work on improving productivity in order to provide the foundations for sustainable growth in real wages.

"The UK jobs machine powers on. Recruitment intentions are high … but we urgently need to see jobs growth accompanied by productivity growth for workers to feel the benefits of the recovery too. This would help place it on a more balanced and sustainable footing and create the economic headroom for real wage increases," Mark Beatson, chief economist at the CIPD, commented on the survey on August 11.

According to the official data, productivity growth, measured by output per hour worked, is still around 4% lower than its pre-recession level, as wage growth remains significantly below consumer price inflation as well as house price inflation, which on average has been rising 10% on the year for the whole of the UK, and as much as 21% in London.

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