The latest Office for National Statistics (ONS) labour market figures showing a fall in unemployment on both official measures are likely to intensify fears of an impending pay price spiral that would trigger further interest rate hikes. But commentators should take care not to overstate the current buoyancy of the UK jobs market and stop talking as though a winter pay surge is already a done deal ñ which carries the risk of becoming a self-fulfilling prophecy, says Dr John Philpott, Chief Economist at the Chartered Institute of Personnel and Development (CIPD).
Dr Philpott comments:
Demand for employees weakens despite fall in unemployment
ìThe welcome fall in both the Labour Force Survey measure of unemployment (down by 29,000 in the September-November 2006 quarter) and claimant unemployment (down 5,500 in December) plus a small (14,000) quarterly rise in the number of people in employment, at first glance suggests that the jobs market is getting tighter. But dig a little deeper and the picture looks much more complex.
ìThe quarterly rise in employment masks a 52,000 fall in employee numbers ñ the overall rise is explained by more people in self-employment (up 49,000) plus more being supported on government schemes (up 22,000). The number of full-time employees in fact fell by 105,000 in the quarter. Moreover, within a substantial quarterly rise in the number of temporary employees (35,000) there was an unusually large increase (26,000) in the number moving into temporary jobs because they could not find permanent jobs.
ìThe fall in unemployment meanwhile should be seen in the context of a 74,000 rise in the number of economically inactive people (i.e. those outside the jobs market) including 40,000 more who, though inactive, say they want a job.
ìLooked at in the round, todayís figures indicate that the demand for labour is not strengthening greatly relative to the supply of labour, with demand for employees, and especially full-time permanent employees, in fact showing signs of weakness. The suggestion that the labour market is getting tighter at present is therefore misleading.
Risk of talking up pay growth
ìInterest rate setters at the Bank of England will take some comfort from the fact that the annual rate of average pay growth (including and excluding bonuses) remained stable in the period to November 2006. But with pay settlements tending to track the rise in Retail Price Index (RPI) inflation it remains possible that growth in regular pay (i.e. excluding bonuses) will at some point soon breach the 4.5% limit consistent with the governmentís target for Consumer Price Index (CPI) inflation.
ìHowever, this outcome should not be considered a fait accompli. There is no ëiron lawí of pay setting that requires settlements to at least match every movement in the RPI ñ and this winter it is imperative that they do not if a further rise in interest rates, and what this would mean for jobs, is to be avoided. Any suggestion that inflation matching or busting settlements are somehow a ëdone dealí should therefore be strongly resisted ñ particularly at a time when the balance of supply and demand in the labour market is fairly conducive to modest settlements.
ìIn approaching the winter pay round employers in all sectors will need to emphasise to staff that inflation will start to move back to target later this year come what may and that any squeeze on their incomes stems from last yearís rise in inflation. Trying to make up for this will only lead to further pain. But in getting this message across, sensible employers will ensure that calls for restraint apply right across their organisations, from the boardroom to the office and factory floor.î
Winter pay surge ënot a done dealí says CIPD Chief Economist
.
