18 April 2023
Strong demand for labour in February, combined with a mere 0.1-percentage point (ppt) tick down in average private sector wage growth suggests the labour market is still far too hot for the Monetary Policy Committee (MPC) to declare its “job done” and raises the chances of another 0.25-basis points (bps) rate hike in May.
The decider will be the inflation data, due on Wednesday, but it will be difficult for the MPC to ignore the strength of the wage data. We now expect a 25-bps hike in May, having previously expected a hold.
Job demand still strong
Employment rose by a whopping 169,000 in the three months to February, its largest jump in almost a year, signalling that demand for labour is still extremely strong. However, looking at the employment data in more detail suggests it is not quite as strong as it appears at first glance.
Brisk growth in employment in the three months to February was driven by a 134k rise in self-employment, with employee numbers rising by a mere 18k. Within employees, full-time positions fell by 93k, while part-time positions increased by 111k. An increase in self-employment and in part time workers can suggest there is a hidden slack in the workforce.
Despite the rise in employment, the unemployment rate rose from 3.7% in January to 3.8% in February. This was because the number of inactive people fell by 153,000, offsetting the rise in employment. However, inactivity is still more than 300,000 higher than before the pandemic (about 1% of the total workforce). What’s more, the drop in inactivity in the three months to February was entirely driven by a massive 181,000 drop in the number of students. The number of people not working because they are sick actually rose by another 72,000. Without solving the sickness issue plaguing so many people it will be difficult, if not impossible, to get the UK back to sustained growth, especially as the UK working age population also fell by 7,000.
Overall, with the unemployment rate at just 3.8% it seems clear that businesses demand for labour is holding up well, even as the broader economy slows.
Pay growth slowing but still far too high for the MPC
Regular wage growth was unchanged at 6.6% in the three months to February — January was revised up from 6.5%. Whole-economy wage growth including bonuses was unchanged at an elevated 5.9% (revised up from 5.7% in the previous month).
Regular pay growth in the private sector is more important for the Bank of England (BoE), and it fell only slightly to 6.9% in the three months to February, from 7.0% previously. We expected a much bigger slowdown to 6.5%. In the March minutes, the BoE said it expected private sector wage growth to be weaker than its earlier projection of about 7%, but fell short from mentioning by how much.
Admittedly, there were upward revisions to the wage data, but on an underlying basis private sector pay growth picked up sharply, surging to 11.7% on a month-on-month annualised basis in February from 2.8% in January. That’s well above the 3%-3.5% consistent with the BoE’s 2% inflation target.
Overall, today’s data suggests the labour market is not easing quickly enough for the MPC to be comfortable – pointing to another 25-bps rate hike in May. If the labour market remains stubbornly tight, interest rates might have to go even higher. But without solving the growing structural problems related to sickness, the UK will continue to underperform.