UK wages grow at fastest rate since September 2015, while unemployment rate retains 11-year low

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Average wages grew by an annual rate of 2.8 per cent in the three months to November (Source: Getty)

Wages grew faster than expected at the end of 2016, while unemployment stayed steady at 4.8 per cent, as the UK labour market showed little sign of any short-term Brexit effect.

Weekly pay grew by an annual rate of 2.8 per cent including bonuses from September to November, according to the Office for National Statistics. Pay excluding bonuses grew by slightly less, indicating bonus sizes are rising slightly quicker than average wages.

Meanwhile the unemployment benefit claimant count dropped by 10,100, beating expectations of a rise of 5,000.

Read more: Tight labour market should not make BoE raise rates: MPC member

The figures add further weight to a picture of economic health in the UK. Unemployment has continued to fall to levels not seen since well before the financial crisis, prompting many economists to predict the UK is reaching full employment, the point at which there is little slack left in the labour market.

Less than five per cent of the workforce has been unemployed since April 2016, with no directly observable effect from the vote to leave the EU in the months since.

Suren Thiru, head of economics at the British Chambers of Commerce, said: "Overall, with employment levels still close to record levels and unemployment continuing to fall, the latest indicators confirm that the UK jobs market remains a major bright spot for the UK economy."

However, prospects for the coming year are more complicated, with inflation weighing on workers’ purchasing power. The National Institute of Economic and Social Research (Niesr) predicts inflation of 3.7 per cent this year, well above the Bank of England’s prediction of 2.7 per cent.

Angus Armstrong, director of macroeconomics at Niesr, said: “The most interesting thing is going to be be the extent to which inflation pressures pass through.”

Read more: Rail fares have increased twice as fast as wages in the past 10 years

Real wage growth, which takes inflation into account, has stayed steady for the last five months, according to Laura Gardiner, senior research and policy analyst at the Resolution Foundation.

“We might have real wage growth down at one per cent in a year’s time,” she says. This decade could be the “worst in at least 100 years” for workers’ pay packets, she says.

After the Autumn Statement in November the Institute for Fiscal Studies called the lack of real wage growth “a dreadful situation” that was unprecedented since the Second World War.

This has happened despite a fall in unemployment levels, with a rise in part-time or underemployment blamed.

This squeeze on real pay is generally counter-intuitive with such a tight labour market. Employees theoretically have higher bargaining power in an economy nearing full employment, but the “uncertainty on the horizon” could reduce this effect, according to Michael Martins, an economist at the Institute of Directors.

“The UK’s labour market has held up well since the referendum vote, reflecting the inherent flexibility that allows firms to adopt a ‘wait and see’ approach when faced with uncertainty,” he said.

Meanwhile, “increased access to credit should help to cushion the blow and maintain the UK’s consumption-driven economy, at least in the near future,” he added.

With inflation set to rise to 2.7 per cent in 2017, an economy nearing full employment would traditionally allow scope for the Bank of England (BoE) to raise interest rates and reduce the amount of money flowing into the economy.

However, BoE Monetary Policy Committee member Michael Saunders has said this may not necessarily be the case, with the Bank willing to run at or near full employment, with unemployment below five per cent, and with higher inflation.

The Bank hopes historically low interest rates, set in the immediate aftermath of the Brexit vote, will be able to absorb shocks caused by uncertainty over the process of leaving the EU as well as the rise in inflation.

Howard Archer, chief UK and Europe economist for IHS Markit, warned the good news may not last, despite recent strength.

"The labour market has been helped by the economy’s resilience so far since June’s Brexit vote, but 2017 is likely to prove increasingly difficult for the economy and the jobs market," he said. "Deteriorating consumer purchasing power and likely increasing business uncertainties and caution over Brexit are expected to take a toll on growth and employment."

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