Weaker jobs market needs early cut in interest rates

Todayís official statistics from the Office for National Statistics (ONS) indicate that the labour market is cooling more rapidly than expected, with a particularly worrying rise in the number of jobless people who want work. The statistics are consistent with the CIPDís quarterly Labour Market Outlook report, which showed an abrupt slump in recruitment confidence levels in the medium to long term.

John Philpott, CIPD Chief Economist, said:
ìThe spring labour market figures are easily the weakest for some time. Only in the public sector is employment and pay still buoyant. The big worry now is that more private sector jobs could be at risk later this year if the Bank of Englandís Monetary Policy Committee (MPC) decides to keep interest rates on hold until the autumn.

ìTo date the MPC has been very successful in signalling to employers that it will act to ensure that any cyclical dips in demand will be short and shallow. As a result there has been a tendency for employers to hoard rather than shed staff during slow periods. But the MPCís challenge during the current slowdown may prove harder because employers in labour intensive service sectors are amongst those experiencing the toughest conditions.

ìAs recent CIPD surveys have shown, while employers are relatively sanguine about short-term job prospects there is growing pessimism about the medium term. This raises the possibility of a serious jobs squeeze later this year and into 2006 unless the MPC acts to improve employer confidence.

ìSo far, as todayís ONS figures and CIPD surveys also show, weaker job conditions are emerging in the form slower recruitment rather than increased redundancies. This may explain why, on the supply side of the jobs market, weaker conditions appear mainly in the form of a sharp rise (114,000 in the three months to May 2005) in the number of economically inactive people wanting work rather than higher measured unemployment.

ìIn the present climate, private sector employers are acutely aware of the need to keep pay costs in check ñ and todayís figures show that they are doing so, in contrast to the public sector where pay rates are continuing to rise. The risk is that if private sector employers think they face a marked slowdown they will try to cut costs by shedding jobs. This of course could present an even greater threat to continued economic stability by hitting consumer confidence.

An August cut in interest rates of at least a quarter of one percent by the MPC would help avert a jobs squeeze and greatly reduce the chances of the economy suffering a hard landing. But any further delay could prove costlyî