Unemployment hits 40-year low but wage growth stalls

Posted May 19, 2017

While the statistics showed employment at a record high, a combination of stagnant wage growth and Tuesday's higher than expected inflation figure suggests United Kingdom households will be hit with a fall in their real income.

"The unemployment rate dropped to 4.6% in the 3 months to March 2017, down from 5.1% a year earlier, and is now at its lowest since 1975", the press release published on the United Kingdom government's website said.

"With yesterday's inflation figures showing CPI at 2.7 percent and expected to rise even further, prices are likely to outpace wage growth, tightening the squeeze on United Kingdom households". The BoE says that despite the fall in unemployment, there is little pressure on employers to raise pay sharply which could feed a more permanent inflation problem.

That meant regular pay, when adjusted for fast-rising inflation, fell by 0.2 percent, the first fall since the third quarter of 2014, the Office for National Statistics said.

Last week, the Bank of England warned that inflation as measured by the Consumer Prices Index (CPI) would peak at just below 3% this year.

The unemployment rate fell to 4.6 percent, the lowest since 1975. The number of unemployed dropped 53,000 to 1.54 million people while of those employed rose 122,000 to a record 31.9 million.

Rising prices for clothing, electricity and airfares contributed to the increase.

The BoE expects wages to rise by 2 per cent this year before picking up in 2018 and 2019.

Paul Hollingsworth, UK economist at Capital Economics, said despite the intensifying squeeze on households, the strength of employment was "one reason to be optimistic that the slowdown in spending won't be too severe". The figure fell by 50,000 in the last three months of 2016.

On Tuesday, figures showed inflation hit 2.7% in April, up from 2.3%, its highest since September 2013.

There was also a big rise in the cost of clothes and shoes, most of which are made overseas.

In a summary of business conditions for May, the Bank said consumer goods price inflation "had picked up markedly".

But pay excluding bonuses rose by 2.1 percent year-on-year, the weakest increase since July and below expectations for a 2.2 percent rise in a Reuters poll of economists.

'Many have pointed to wage growth as the "missing piece of the puzzle".