What should we make of the surprise increase in unemployment this week? The jobless rate went up and employment fell. The number of unfilled vacancies also dropped slightly. Is this a sign that the UK jobs recovery is running out of steam?
I think not, for three reasons. First, the period these unemployment figures cover is March to May 2015 – the three months before the General Election. Businesses are likely to have been cautious about hiring new workers in this period due to uncertainty about the election result. So we could well see an employment rebound after the election, as this temporary nervousness unwinds.
The vacancy figures provide some support for this view. Larger companies continued to report more vacancies, but smaller firms (employing fewer than 50 workers) were more reluctant to hire. This is what you would expect if uncertainty was making employers more nervous about recruitment. Taking on an extra worker is a much bigger decision for a firm with fewer employees, while larger companies can take a longer-term view on recruitment.
A second reason for continuing to put faith in the jobs recovery is the trend in full-time regular employment. The number of employees working full-time has continued to increase at a reasonably healthy rate, up by 45,000 in the past three months. Over the past year, there has been an increase of 382,000 full-time employees, a rise of 2 per cent. This has been the fastest growing job category, with the number of part-time employees up just 0.7 per cent and self-employment falling.
A third encouraging sign from the latest labour market figures is that we seem to be moving into a new phase of recovery, with pay (and hopefully productivity) now increasing more strongly. In the private sector, regular pay in the past three months is now 3.3 per cent up on a year ago – the strongest wage growth for nearly seven years. This is a very significant rise on less than 1 per cent wage inflation a year ago and not far short of the 3.9 per cent average recorded before the crisis, from 2001 to 2007.
This is what we would expect to see as unemployment comes down, slack in the labour market is taken up, and job vacancies become harder to fill. However, in this new phase of the jobs recovery, we should also expect to see more moderate increases in employment. The big falls in unemployment we have seen over the past two to three years cannot continue in a much tighter labour market.
Stronger wage growth and tighter labour market conditions, however, will exert upward pressure on inflation. So the message to the Monetary Policy Committee from the latest jobs and wage data is clear. Despite the small rise in unemployment, they should raise interest rates soon. The current Bank Rate of 0.5 per cent was set to deal with a severe financial crisis in 2009 and its aftermath. It is no longer appropriate for an economy entering the seventh year of economic recovery.