It’s the great conundrum of the UK economy today.
Why is the labour market looking ever healthier, even as the economy slips into a double-dip recession?
The latest labour market figures from the Office for National Statistics are almost uniformly positive: employment up, unemployment down, the number of people claiming jobseekers’ allowance unexpectedly down. Even the rate of economic activity is down to the lowest level since 1991.
It’s not even as if the improvement is only down to a rise in part-time working (although that has certainly been a trend in past months). In these figures, for the three months to June, the number of people in full-time employment rose by 130,000 – almost 60,000 more than the increase in part-time workers.
Meanwhile, over in the US, which has a growing (rather than shrinking) economy, the unemployment rate is rising.
So what’s responsible for the bounce? There are three things to bear in mind.
The first is that employment numbers are what’s known as a lagging indicator. It takes some time for a change in the country’s economic activity to manifest itself in the jobs figures. After all, companies typically don’t start firing or hiring for some months after their profits rise or fall, so you tend to see unemployment shooting up only six to 18 months after the relevant change in economic activity.
But even bearing that in mind, the improvement in the jobless figures is odd. After all, Britain’s economy never really bounced back from the 2008 recession (it’s been tumbling along the bottom), so why should the state of the labour market be improving as markedly as it is? It could well be that the current slowdown will push unemployment higher towards the end of the year – but what the “lag effect” doesn’t explain is why the figures have improved.
It may, in part, be down to a pre-Olympics boost in hiring, so we’ll have to see whether that drops out of the data in the coming months.
The second potential explanation is that there’s something wrong with the data – whether the unemployment figures themselves or, more likely, the growth numbers. There is a serious discrepancy between what the overall GDP figures are telling us about UK economic growth and alternative measures of activity (for instance, the PMIs).
Even allowing for the fact that the second quarter GDP numbers were distorted by the Jubilee bank holiday, it might be that the economy is actually a touch stronger than the official figures suggest. But, then again, the Office for National Statistics has had plenty of opportunities to revise the figures and has not done so thus far.
The third key issue is that the overall unemployment rate masks the fact that some pain is happening beneath the surface – albeit not through job cuts. Households are having to accept pay increases that are far beneath the rate of inflation. The latest labour market figures show wage inflation is running at 1.6% – half the rate of RPI inflation.
This squeeze on household incomes is painful – it means families are suffering an almost unprecedented fall in their disposable income. However, the flipside is that it means many companies are able to afford to keep those workers in their jobs. To put it in economic terms, the cost of labour is falling in real terms, but without the level of unemployment needing to fall.
Now, this could be a temporary effect: sometimes companies try to hold onto employees for a period before they realise that this is unsustainable and suddenly cut jobs. And they are certainly vulnerable to any sudden change in the economic climate that could precipitate this – for instance a sudden increase in real interest rates or a serious euro crisis.
But in the meantime, the conundrum of the UK labour market remains just that. At some point, it ought to rediscover gravity, but it’s doing an excellent job of defying it for the time being.