Rising Wages and Employment as UK's Labour Market Bounces Back

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The latest labour market data for the UK shows the recovery extended into May with the number of payrolled employees increasing for the sixth consecutive month, up by 197K in May 2021 to 28.5 million.

The increase in employment on a rolling three month basis came in at 113K for the three months to April reports the ONS, which was below the market expectation for a reading of 150K.

However, the breadth of the report was largely supportive of the improving sentiment towards the UK economy.

"Things are looking up in the UK jobs market, though the remaining months of 2021 are likely to be turbulent," says James Smith, Developed Markets Economist at ING Bank.

Despite the opening up of the economy, wage pressures were seen to be growing with the Average Earnings Index + Bonus rising 5.6% in April, which is well ahead of the 4.9% expected by the market.

Wages had increased during the pandemic as lower paid workers fell out of employment, but this was expected to reverse as these jobs returned.

The number of job vacancies in March to May 2021 was 758K which is only 27K below the level before the coronavirus pandemic in January to March 2020, the ONS says most industries have recovered to show vacancies above pre-pandemic levels.

"May’s easing of lockdown restrictions on pubs and restaurants catapulted the hospitality sector from wiped out to white hot. The hospitality sector has suffered a greater number of job losses under the pandemic than any other, but in the three months to the start of June, hiring came back with a bang - and the number of vacancies spiked by an incredible 266%," says Jack Kennedy, UK economist at Indeed.

The rising wage pressure perhaps reflects the limited supply of workers to fill the numerous jobs now on offer in the economy, with the pandemic bringing about demographic changes.

For instance, there are numerous reports in the national media concerning the hospitality industry struggling to find employees.

"The surge in demand from employers is exceeding the supply of candidates in some sectors - and this is creating hiring bottlenecks," says Kennedy. "If this pattern continues, we would ordinarily expect to see a tightening of the labour market and a gradual rise in wages."

The concern for the Bank of England is that the upside pressure on wages translates into unexpected inflationary pressures, which could in turn prompt the requirement for interest rate rises.

Rising interest rates are in turn broadly seen as supportive of Sterling, particularly if the Bank of England is moving faster than its peers.

Above: UK wage trends, source ONS. 

But economists at Pantheon Macroeconomics are more sanguine on wage growth as deeper dig into the data reveals near-term momentum is in fact quite weak.

"Wage growth also was supported in April by the concentration of job losses in the second half of last year at the low end of the pay spectrum. The ONS estimates compositional changes among employees boosted the headline rate by a hefty 2.5pp in April. On an underlying basis, then, wage growth is quite soft," says Samuel Tombs, Chief U.K. Economist at
Pantheon Macroeconomics.

"Indeed, the three-month-on-three-month annualised rate of growth in AWE excluding bonuses—a better guide to the trend—was a relatively subdued 3.0% in April. Near-term momentum was weak due to the meagre 2.2% increase in the National Living Wage—the least since 2013—and by the pay freeze for most public sector workers," he adds.

Looking ahead, economists say the labour market will see some sizeable changes in coming months as the government's job retention scheme (furlough) is wound down ahead of the September cutoff. 

"The winding down of the furlough scheme in coming months is likely to thrust more people into jobseeking and boost the supply of candidates. For now the labour market is responding well to the demands placed on it and helping the country’s economic engine rev even faster," says Kennedy.

"The remaining months of 2021 are likely to be turbulent for the UK jobs market. Unemployment is set to rise come the end of the furlough scheme in September, though many forecasters, including ourselves, now believe the spike will be considerably less pronounced than it might have been had support ended earlier," says Smith.

Pantheon Macroeconomics say they doubt that the furlough scheme can be wound up at the end of September without triggering a renewed decline in employment in the final months of 2021.

"Many fully-recovered sectors, such as manufacturing and retail, still were heavy users of the CJRS in April; they will not relinquish all of the productivity gains that they have realised over the last year by bringing back all of their staff," says Tombs.

After a further modest decline in unemployment in the near term, Pantheon Macroeconomics still expect the unemployment rate to rise to about 5.2% in the fourth quarter.