The UK labor market showed signs of both strength and weakness in the three months through July, as wage growth reached a record high but unemployment also ticked up and vacancies fell. The mixed data may pose a challenge for the Bank of England, which is facing pressure to raise interest rates to curb inflation.
Wage Growth Surges
Average earnings excluding bonuses rose 7.8% from a year earlier, matching the fastest pace since the series began in 2001, the Office for National Statistics (ONS) said on Tuesday. The figure was in line with economists’ expectations in a Bloomberg survey.
The surge in wage growth partly reflects the distortions caused by the pandemic, such as the comparison with depressed wages a year ago and the compositional effects of job losses hitting low-paid workers harder. However, underlying wage pressures are also building up, as employers compete for staff amid labor shortages in some sectors.
The ONS estimated that excluding these factors, wage growth was between 4.9% and 6.3%. For pay excluding bonuses, the figure was between 3.5% and 4.9%.
The unemployment rate rose for a third consecutive month to 4.3% in the three months through July, up from 4.2% in the previous period. The increase was driven by more people entering the labor force, as the number of employed people also rose by 183,000 to 32.4 million.
The ONS said that the level of employment was still 201,000 below its pre-pandemic level in February 2020, while the number of people on payrolls was 293,000 lower.
The number of people on furlough fell by 340,000 to 1.6 million in July, according to provisional data from HM Revenue and Customs. The furlough scheme is due to end on September 30, raising concerns about a possible rise in unemployment in the coming months.
The number of job vacancies fell by 178,000 to 1.03 million in August, after reaching a record high of 1.21 million in July. The ONS said that the decline was mainly due to a fall in vacancies in accommodation and food services, which had seen a sharp increase in previous months as lockdown restrictions eased.
The ONS also noted that there were signs of mismatch between the demand and supply of labor, as some sectors faced skills shortages while others had excess workers. The ratio of vacancies to unemployed people fell to 1.8 in August, down from 2.1 in July, but still above its pre-pandemic level of 1.5.
Implications for BOE
The mixed labor market data may complicate the decision-making process for the Bank of England, which is grappling with above-target inflation and uncertainty about the economic outlook.
The BOE expects inflation to peak at 7.1% in August before falling back toward its 2% target in 2023. However, it also warned that meeting its inflation goal will require a modest withdrawal of monetary stimulus.
Money markets are pricing in a quarter-point hike to 5.5% by November and see a more-than 50% chance of a further rise by the end of the year.
However, some BOE officials have suggested that they are nearing the end of their tightening cycle, while others have urged more caution until the impact of the furlough scheme’s expiry becomes clearer.