Photographer: Simon Dawson/Bloomberg

U.K. Pay Pressures Remain Subdued in Tight Labor Market

  • Unemployment held at decade-low of 5.1% in fourth quarter
  • Total earnings growth slowed to 1.9%, ONS data showed

U.K. employers are showing few signs of responding to a tightening labor market.

While unemployment held at a decade-low of 5.1 percent in the fourth quarter, pay pressures remained weak with earnings growth slowing to 1.9 percent, the Office for National Statistics in London said on Wednesday. Pay growth excluding bonuses edged up to 2 percent.

“While the employment rate continues to hit new highs and there are more job vacancies than ever previously recorded, earnings growth remains subdued,” said ONS statistician Nick Palmer.

The data are likely to reinforce expectations that the Bank of England remains a long way from raising its benchmark interest rate from a record-low 0.5 percent. Governor Mark Carney has signaled that officials have room to keep rates low, while several policy makers have suggested that near-zero inflation is keeping a lid on pay settlements.

“We’re seeing some normalization in the employment data slowly, more moderate and plausible rates of growth, and most of the evidence is pointing to a subdued earnings outlook,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. “Carney has made pretty clear they need to see much clearer evidence of domestic cost inflation and there’s still not much evidence of that. This all reinforces this theme that rates are not going anywhere anytime soon.”

The pound was little changed at $1.4305 at 11:34 a.m. London time, after touching $1.4245, the least since Feb. 1.

Record Employment

There was a further increase in the economically active population between October and December. This was more than offset by job creation, with the number of people in work climbing 205,000 to a record 31.4 million. As a result, unemployment fell 60,000 to 1.69 million.

Jobless benefits, a narrower measure of unemployment, fell 14,800 to 760,200 in January, taking the rate to 2.2 percent. Both the rate and the level were the lowest since 1975. In December, the total dropped 15,200 instead of the 4,300 fall originally estimated. The ONS said the figures are subject to bigger revisions than in the past because the claimant count now includes Universal Credit, a new type of welfare benefit.

Strong demand for labor was on display elsewhere. Vacancies in the economy rose to a record 776,000 in the three months through January, while the number of hours worked in the fourth quarter surged by 1.7 percent to more than 1 million. The increase in weekly hours suggests productivity fell sharply at the end of last year.

The question for policy makers is how long the labor market can continue to improve before inflationary pressures begin to emerge. While the jobless rate has probably reached its long-run equilibrium level, weak inflation is reducing pressure on employers to raise salaries and productivity remains poor, BOE staff noted this month. Such factors are expected to fade, meaning cost pressures will build unless firms can increase output per worker.

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