In October, the Office for National Statistics (ONS) unexpectedly pulled the plug on the publication of some of its flagship labour market statistics, covering metrics such as unemployment, employment, and economic inactivity. Citing issues with sample sizes and the broader methodology behind the Labour Force Survey (LFS), the statistics were deemed to be unreliable. The figures lost their ‘official’ status, instead being denoted as ‘experimental’, thus adding an element of risk to making assessments of the labour market.
Earlier this week, the ONS reintroduced these indicators. A question to consider now is whether the return of these data points has improved our ability to analyse labour market conditions.
At face value, there does not appear to have been much change. Though the ONS did seem to place more confidence in the absolute value of the figures presented this week, an accompanying note explained that quarterly changes should still be interpreted with caution due to continued sample size issues. Moreover, it was confirmed that the rollout of the Transformed Labour Force Survey, which will supposedly resolve the issues behind the data, has been delayed until the autumn.
Such lingering uncertainty in the data poses several issues. For commentators and forecasters, it is difficult to draw conclusions about future trends when the data describing past trends are deemed unreliable. The task is all the more difficult for policymakers, however, who must assess prevailing conditions when making decisions that will affect the trajectory of the entire economy.
The Bank of England is in a particular tricky situation in this regard. Having paused its rate hiking cycle for a number of months, a key question is when the Bank will begin to reverse this by implementing rate cuts. When making such a decision, members of the Monetary Policy Committee will not only be assessing data on inflation, but broader indicators of economic activity. This is because such broader indicators contain useful information for predicting the future path of price growth. The ability to make accurate assessments of the labour market would be particularly welcomed here, given that continued tightness and above average earnings growth represent some of the main upside risks to the inflation outlook.
The Bank is not completely in the dark when assessing labour market conditions, however. The ONS publishes a range of other indicators and recommended that those analysing the labour market should instead take account of its entire suite of data. Doing so reveals some clear trends. For instance, hiring demand is on a downward trajectory. There were 932,000 vacancies across the economy in the three months to January and, though this remains up on pre-pandemic levels, the figure was down on the quarter for a 19th consecutive period. Pay growth also seems to be weakening. Though earnings growth was quite strong in Q4, at an annual rate of 5.8%, this has now decelerated for two consecutive quarters since the 8.4% recorded in Q2. Both of these indicators are broadly telling the same underlying story: the labour market remains tight by historical standards, but there are early signs of loosening.
These emerging trends are largely expected to continue across 2024, reducing the risk of second-round inflationary effects hitting the economy. For instance, earnings growth is expected to be slower across 2024, in spite of upcoming policy changes that will put upward pressure on pay from April onwards. Meanwhile, vacancies are expected to decline by 9.8% on the year, with demand for workers continuing to weaken. Some of this effect will be attributed to the feeble demand conditions observed in late 2023, as indicated by the recently confirmed technical recession, with decisions over labour inputs often taking place with a time lag. The lagged effect from poor economic growth in 2023 is ultimately expected to put upward pressure on the rate of unemployment in 2024, regardless of the exact designation of the statistic used to measure it.
With these signs of loosening, the Bank of England should have enough confidence that the risk of second-round inflationary effects from the labour market is reducing. As such, Cebr sees the continued absence of official LFS data as being of minimal risk to a rate cut taking place in the first half of the year. Indeed, it would be short-sighted of the Bank to allow the absence of such data alone to delay the change to its policy direction, given that doing so could significantly curtail the economy’s growth prospects this year.
For more information contact:
Sam Miley, Managing Economist and Forecasting Lead
Email: smiley@cebr.com, Phone: 020 7324 2874
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.