As I write, the Governor of the Bank of England, Sir Mervyn King, is still taking questions at what is his last Inflation Report press conference. The Bank’s overall message is slightly more optimistic than it has been of late – it reckons the economy will grow a little faster this year than previously forecast, up from 0.9% to 1.0%, while Consumer Price inflation will be a little lower, albeit still well above the rate the Bank targets. However, in his opening remarks at the conference Sir Mervyn also stressed that “this is no time to be complacent – we must press on to ensure a recovery and bring down unemployment”, a further stark reminder of which was given by the latest Office for National Statistics labour market figures, also published this morning.
The UK jobs market clearly took a turn for the worse in the first quarter of the year. The number of people in work fell by 43,000 and unemployment increased by 15,000 to 2.52 million (7.8%). Men and people on temporary contracts or working as self-employed contractors are being hit hardest by this latest bout of weakness, suggesting that employers are primarily making adjustments to the flexible component of the workforce in the face economic uncertainty. This helps explain the apparent paradox of a corresponding fall in redundancies, the number of which will generally rise only when employers are cutting their core permanent staff.
Young people aged 16-24 have also suffered a fall in employment in the latest quarter (down 46,000) but this has not shown up in higher youth unemployment, which has actually also fallen by 17,000 because a large number of those in full-time education have stopped looking for part-time jobs to supplement their student income.
The English regions have fared particularly poorly in 2013 so far. Most have registered a rise in unemployment in the first quarter, with the notable exception of the North West which managed a sharp fall in unemployment (down 18,000) only because a large number of people responded to an equally sharp contraction in jobs by exiting the labour market. By contrast, Wales and Scotland have enjoyed both decent employment growth and falling unemployment, signalling an end to the ‘Celtic jobs drought’ of 2012.
Ironically for the English regions, while 2012 saw strong employment growth and falling unemployment in a flat lining economy, the slightly better GDP growth registered in the early months of 2013 has thus been accompanied by falling employment and a renewed rise in joblessness. With average weekly earnings now increasing at a paltry rate of just 0.4% – which means a real cut of 2.4% relative to Consumer Price Inflation – 2013 is shaping up to be the ‘hard slog’ year for UK workers I anticipated in my annual forecast last December. Indeed, combining these latest pay and jobs data, the Jobs Economist Labour Market Temperature Index (LMTI) shows that the UK jobs market is now as cold as it was two years ago in the spring of 2011.
The LMTI is constructed from official data on unemployment, (CPI) price inflation, nominal pay increases and changes in average hours worked per person. A zero reading represents the economy’s potentially attainable combination of unemployment and real pay growth, as obtained from Office for Budget Responsibility estimates. A reading above zero indicates excess demand for labour, a reading below zero (i.e. the chill factor) indicates deficient demand. An increase in the reading indicates that the labour market is heating up (conditions improving), a decrease in the reading indicates that the labour market is cooling down (conditions deteriorating).
The labour market was at its coldest at the depth of the recession in February 2009, at which time the LMTI reading fell to minus 13. The reading then increased and broadly stabilized through the remainder of 2009 and 2010 before moving back onto a decreasing trend through to the end of 2011. A combination of strong growth in employment, falling unemployment and moderation in the real pay squeeze saw the LMTI reading rise to minus 5 by autumn 2012. However, since then rising unemployment and a bigger pay squeeze has again lowered the LMTI reading, taking it back to where it was in spring 2011.
The UK labour market has proved remarkably good at creating jobs in the past two years but only because people have been desperate to price themselves into work. As the LMTI shows the prevailing combination of high unemployment and falling real pay indicates a significant ongoing shortfall in demand. People in work and jobseekers alike have now experienced five years of severe labour market chill. And with the somewhat warmer conditions of summer 2012 having given way to a much colder 2013, life in our deep chilled jobs market looks set to continue for some considerable time yet.