LONDON • UK unemployment dropped to a new 43-year low in the three months through June, but the pace of wage growth eased.
The jobless rate stood at 4%, the least since February 1975, the Office for National Statistics said yesterday. Economists had expected it to stay at 4.2%.
The decline helps explain why the Bank of England (BoE) increased interest rates this month. Policymakers believe inflationary pressures are building in the labour market as skill shortages force employers to raise wages to attract and retain staff.
Yet, the absence of stronger pay growth so far also raises questions about whether the central bank committee’s unexpected unanimous decision was justified.
There was little sign of overall wages stirring in the latest data — the rate slowed to a nine-month low of 2.4% between April and June — but the BoE sees a pickup toward 3.5%.
For policy, much also depends on productivity.
Without a significant improvement, firms may find their profit margins coming under pressure and increase prices to compensate.
Flash figures for the second quarter show output per hour rose 0.4%, leaving productivity up just 1.5% year-on-year — below the rates enjoyed before the financial crisis.
The pound initially climbed after the data, before erasing its gains to trade little changed at US$1.2775 (RM5.22) as of 10:17am in London yesterday. The market- implied probability of another BoE rate hike in May 2019 edged up to about 45% from 39% on Monday.
BoE officials expect unemployment to fall to 3.9% this year and Governor Mark Carney has signalled that further rate hikes will be needed to return inflation to the 2% target, assuming Britain avoids a chaotic departure from the European Union next year.
Wage growth excluding bonuses slowed to 2.7%, the weakest since January, but still ahead of the 2.4% rate of inflation.
Upward pressure on settlements is expected to come from the public sector, where millions of workers will this year benefit from the easing of a cap on pay increases in place since 2010.
“There remains precious little sign that wage growth is set to take-off — undermining a key assumption behind the Monetary Policy Committee’s recent decision to raise rates,” said Suren Thiru, head of economics at the British Chambers of Commerce.
“The pace at which pay is exceeding price growth remains negligible, and is therefore unlikely to provide much respite to the financially squeezed consumer.”