THE headlines this week were about a rise in UK unemployment –up 25,000 in the past three months. The main weakness was in part-time employment, which fell by nearly 100,000. Full-time employment rose, albeit more slowly than in previous quarters. The number of full-time employees is more than 400,000 (2.2 per cent) up on a year ago.
The unemployment figures we are now looking at relate to the period around the General Election. Uncertainty about the result may have affected hiring by employers, so we should not make too much of the small rise in unemployment. Over the past three and a half years, unemployment has fallen from nearly 2.7m to 1.85m. The rise of 25,000 last quarter compares with an 850,000 reduction in the previous three years.
We need to look at the bigger picture in the UK labour market and take a longer-term view. Most economists see the labour market as having a “natural rate” or “equilibrium rate” of unemployment. We cannot pinpoint exactly what this rate is, but our experience before the financial crisis would suggest that it is somewhere around 5 to 5.5 per cent. The current unemployment rate of 5.6 per cent is only just above this level.
In the 1990s, the unemployment rate fell from a peak of 10.6 per cent to around 5.5 per cent in 2000. The pace of reduction of unemployment then slowed dramatically and the jobless rate fluctuated between 4.7 per cent and 5.5 per cent. The average rate was 5.1 per cent in the eight years 2000 to 2007.
There is other evidence that we are close to the economy’s natural or equilibrium rate of unemployment. The number of unfilled vacancies is above the pre-crisis level. Between 2001 and 2008, vacancies averaged 620,000, with about 2.5 unemployed people for each vacancy. The current figure is 735,000 and rising, and the unemployment/vacancy rate is back to 2.5.
Wage growth is picking up strongly – consistent with a tightening labour market. A year ago, private sector regular pay was increasing at just 1 per cent a year. Now the figure is 3.3 per cent. With inflation at zero, this represents 3.3 per cent real wage growth – very healthy by comparison with a historical norm of around 2 per cent.
Skill shortages are also becoming an increasing problem for business. One in five manufacturers report skill shortages as a constraint, according to the CBI. This level of skill shortages was last seen on a sustained basis in the Lawson boom of the late 1980s.
So the big picture from the UK labour market is that unemployment is close to the natural rate, vacancies are high and real wages are picking up strongly. The recent small rise in unemployment could be reversed soon if – as I suspect – pre-election uncertainty was a factor. But it would be unrealistic for the unemployment rate to continue to fall as quickly as it has in the past three years. It should level off at 5 to 5.5 per cent.
Despite these better labour market conditions, however, interest rates are a long way from a normal setting. If the Monetary Policy Committee does not address this issue soon, we will be in trouble.
Andrew Sentance is senior economic adviser at PwC and a former member of the Bank of England MPC.