Data released today by the Office for National Statistics show that the UK unemployment rate fell again during the three months to June, and now stands at 6.4%, down from 6.5% over the three months to May. The figures show that there are now 2.08 million unemployed, 437,000 fewer than a year ago.

 

However, wages including bonuses fell 0.2% over the three months to June, compared to a year earlier. This was partly due to April 2013 seeing unusually high wage growth as employers shifted last year’s bonuses from March to April. This represents a fall from the 0.3% growth seen in the equivalent figure for May, and the first fall in gross pay since the recession of 2009. Excluding bonuses, there was pay growth of 0.6%, still significantly below the levels most were predicting for this stage of the economic cycle. These numbers relate to cash values – real pay growth (which measures spending power and are thus inflation-adjusted) is further into negative territory.

 

Wage growth remains the missing element of the UK’s economic recovery. The first half of 2014 showed strong growth in GDP and robust performance across all sectors driven by high business and consumer confidence. However, there has yet to be a sustained period of substantial growth in pay. Wage rises have only broken the 2% mark in one month over the past two years.

 

The Bank of England’s Inflation Report was also released this morning. The Bank’s measure of “spare capacity”, referring to the unused productive resources in the economy, is now the key factor in its policy of forward guidance which determines monetary policy. Spare capacity is estimated to have fallen from 1-1.5% in February’s report to around 1% in August’s, paving the way for a rate rise sooner rather than later. However, wage growth feeds into the Bank’s calculations of spare capacity; also, with weak rises in pay, the Bank may want to avoid putting extra pressure on mortgageholders through raising rates.

 

Today’s news presents a mixed picture of the labour market: we expect this month’s contraction is an anomaly and it will return to weakly positive next month as April’s figure will no longer affect it. However, significant gains appear elusive even as unemployment falls towards pre-recession levels.

 

UK unemployment rate (LHS), per cent, and annual growth in total pay (RHS), per cent