Pay Increases and Unemployment Grows Less than Expected: UK Jobs Report Surprises to the Upside

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UK labour market data covering the November and December periods have been released and are on balance indicating a more robust picture than the market had been anticipating, although another deterioration in January is likely given the third lockdown.

The ONS says 88K people moved out of paying jobs in the three months to November, which is less than the -100K economists and the market were looking for. It is also an improvement on the -144K reported in October.

The unemployment rate in November stood at 5%, up from 4.9% in October, which is less than the 5.1% markets were looking at. This means the unemployment rate is 1.1% points lower than a year earlier, quite a staggering outcome given the scale of the decline in economic output the country has experienced since February 2019.

The Claimant Count - which covers those looking for out of work benefits - revealed 7K people 'signed on' in November, but this was far less than the 64.3K recorded in October. The market was expecting a figure of 35K.

"Thanks to aggressive fiscal support, the UK labour market has consistently beaten expectations since the pandemic hit the UK in February 2020," says Kallum Pickering, Senior Economist at Berenberg Bank. "We project that the unemployment rate will fall to 4.4% by end 2022, only modestly above its pre-pandemic low. The continued string of better-than-expected labour market data suggest the risks to this call are positively skewed."

Potentially the more surprising element of the report was the increase in average earnings (with a bonus included), which measured a 3.6% in November increase against 2.9% expected and 2.8% in the previous month.

The same increase was reported for job pay without a bonus included.

The increase in pay could reflect an increase in productivity per worker, a phenomenon observed in the U.S. where workers move into jobs that are doing better in the current conditions.

The ONS says annual growth in average employee pay continues to strengthen owing to the compositional effects of a fall in the number and proportion of lower-paid employee jobs.

They explain current average pay growth rates are being impacted upwards by a fall in the number and proportion of lower-paid jobs compared with before the coronavirus pandemic; it is estimated that underlying wage growth – if the effect of this change in profile of jobs is removed – is likely to be under 2%.

Above: Total hours worked still low but continuing to show signs of recovery. UK total actual weekly hours worked (people aged 16 years and over), seasonally adjusted, between September to November 2005 and September to November 2020. Image: ONS.

In October to December 2020, there were an estimated 578,000 vacancies, which is a quarterly increase of 81,000 vacancies. This was the smallest quarterly increase since July to September 2020, but nevertheless indicates a recovery from the sheer drop off in available work seen earlier in the year.

"Despite the increased economic drag from the elevated virus-related restrictions, rising expectations for a strong recovery from spring onwards lifted potential labour demand (job vacancies) during the month," says Pickering.

Above: The vacancies recovery has slowed in October to December 2020 with an estimated 578,000 vacancies, the quarterly increase of 81,000 is half of that in July to September 2020. Number of vacancies in the UK, seasonally adjusted, between October to December 2001 and October to December 2020. Image: ONS.

"Thankfully, vacancies are also rising with 81,000 new job openings reported in the past three months. This should improve as social distancing becomes less of an infection control priority," says Jeremy Thomson-Cook, chief economist at Equals Money.

Looking ahead, Thomas Pugh, UK Economist at Capital Economics, says the outlook for the labour market remains challenging.

"The labour market will probably continue to weaken over the rest of this year, especially once the furlough scheme finishes at the end of April. But a rapid rebound in GDP in the second half of this year should prevent the unemployment rate from reaching GFC levels," says Pugh.