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September 13, 2017

UK jobless rate at 42-year low despite Brexit, but wage growth remains stagnant

UK unemployment fell by 75,000 in the three months to July to the lowest level in 42 years, but workers continue to feel the squeeze as real wages remain stagnant.

Ian Stewart, the chief economist at Deloitte told Verdict that since the recession, wages have struggled to keep up with rising employment.

“Job creation is a huge UK success story. Despite Brexit uncertainties and slower growth, the UK continues to generate ever lower unemployment and ever more jobs,” he said.

“But the recession, and its aftermath, has weakened the link between unemployment and wages. In the past this degree of tightness in the jobs market would be pushing wages higher. Instead earnings growth has flat lined in the last couple of years,” he added.

The percentage of people unemployed fell to 4.3 percent in the three months to the end of July, compared with 4.4 percent in the three months to the end of June, the Office for National Statistics (ONS) said on Wednesday.

Meanwhile, wage growth remained at an annual pace of 2.1 percent, well below inflation, which hit 2.9 percent last month.

Bank of England (BoE) governor Mark Carney said that “an element of Brexit uncertainty” is preventing companies from giving employees bigger wage increases.

Other reasons for stagnant wage growth include poor productivity and firms focusing on ways to offset rising import costs.

Since 2010, public-sector workers have faced a 1 percent cap on salary increases as part of the government’s austerity policy.

What do the unemployment numbers mean for interest rates?

The figures highlight the debate among BoE policy makers over when to raise interest rates.

While stagnating wage growth suggests the current surge in inflation could ease, high employment points to a strong economy.

The interest rate stands at a record low of 0.25 percent, but last month two BoE Monetary Policy Committee (MPC) members backed a rate rise.

Some economists predict that the Bank’s chief economist Andy Haldane could join them this week.

Even if Haldane backs a rate rise, the MPC would still be split 6-3 against raising rates.

However, his decision would signal to the market that a rate increase could be imminent when the Bank updates its forecasts in November.

Andrew Wishart, UK economist for Capital Economics, said a drastic change in MPC policy is unlikely.

“While the continued strength of employment will be welcomed by the MPC, the continued absence of a pick-up in wage growth is likely to keep the doves in the majority.”

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