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UK nears full employment but outlook for wage growth still unclear

17 Dec 2015

The Institute of Directors has said official statistics which showed the unemployment rate fell to 5.2% in the three months between August-October 2015, show the UK is “closing in on full employment”, while a drop in wage growth to 2.4%, including bonuses, raises questions about how wages will fare in 2016.

Michael Martins, Economic Analyst at the Institute of Directors, said:

“Yet again, these latest jobs figures make for welcome reading. The facts are impressive, and, given the turbulence which is affecting many parts of the world, worth repeating. In nearly every aspect, the labour market is tightening. The employment rate is at its highest ever level, the unemployment rate is down to its lowest since well before the crash at 5.2%, and youth unemployment – always a tricky problem to solve – continues to fall impressively. All of this indicates we are closing in on full employment.

“What this means for wages and inflation over the next 12 months, however, is less clear. In theory, a tightening labour market should mean wage rises. This is the trend we saw throughout 2015. But wage growth has outpaced productivity for much of this year, and in the last few months pay increases have trailed off.

“Firms may be taking advantage of the low-inflation era to offer smaller nominal increases in salaries while employees who have benefitted from cheaper food and fuel prices may not be demanding as much. Since so many jobs are still being created, and young and long-term unemployed people are moving back in to work, these new jobs may simply pay less, dragging down the average figures.

“If inflation returns next year, the UK’s ‘productivity puzzle’ will come into even sharper focus. Rising prices will place renewed pressure on employees who will begin to demand higher pay rises in cash terms. If employment remains low and domestic demand holds up, they will be in a strong bargaining position. Both companies and employees will need to boost corporate performance if the high real-terms wage increases we have seen this year are to remain.”

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