UK labour market: Do not read anything into jobs bounce

Be wary of the fall in unemployment: The drop in the unemployment rate from 4.1% to 4.0% will probably make most of the headlines, but it was driven by a jump in the Labour Force Survey measure of employment that is notoriously volatile. The broad sweep of the data paints a picture of a labour market that has cooled from overheating to operating at capacity. As a result, the progress of pay growth back to a pace consistent with the Bank of England’s inflation target is likely to remain slow.

Big picture remains a tight, but cooling, labour market: Due to very low response rates to the Labour Force Survey, we wouldn’t read anything into the above-consensus 373k jump in employment in the three months to August and the associated fall in the unemployment rate. As Chart 1 shows, the quarterly volatility of the survey measure means it is little use on that timescale. Indeed, the steadier count of payrolled employees fell on the quarter in the three months to September. As we have more faith in this number, the big picture remains that employment growth has cooled significantly, closing in on zero in year-over-year terms – see Chart 2. The official measure of vacancies, a forward-looking measure of labour demand, also continued to fall. But a stabilisation in the number of advertisements on Adzuna, the online job advert aggregator, hints that trend may be nearing an end.

Sustained pay pressures: The three-month average of private sector average weekly earnings excluding bonuses eased from 5.1% yoy in July to 4.9% in August, leaving it on track to hit the Bank of England’s (BoE’s) forecast of 4.8% in September (see Chart 3). However, as both we and the central bank have pointed out, this is still well above the 2-3% range that would be consistent with the inflation target (see “The BoE has good reason to hesitate”). Median pay of payrolled employees remained similarly elevated in September.

Gradual cuts: The cooling of pay growth in line with the BoE’s expectations, and the fact that in our view the apparent tightening in the labour market in August was a statistical quirk, means that this release is no obstacle to a 25bp cut on 7 November. Financial markets price in a 50% chance of a further cut in December. However, with no sign of slack emerging in the jobs market and pay growth still elevated, we think the BoE will pause again in December and stick to cutting once a quarter.

Andrew Wishart

Senior UK Economist

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