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And now to this morning’s news – the latest employment data.
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One thing’s for sure, the UK’s labour shortage isn’t going away any time soon.
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The UK jobs market is roaring ahead
The latest UK employment figures came out from the Office for National Statistics (ONS) this morning. Not to put too fine a point on it, they were extremely strong.
In the three months to July, the unemployment rate fell to 4.6%, from 4.7% before. And during August, according to more timely data from HMRC, payrolls grew by 241,000. That puts us back to pre-pandemic levels.
The employment rate (that is, the proportion of people aged between 16 and 64 who are in work) rose to 75.2%. That’s still lower than before the pandemic and the shutdown (when it was sitting at 76.5%) but it’s higher than it was last quarter.
And the inactivity rate – that is, people who are of working age, but aren’t actively seeking work for various reasons – is sitting at 21.1%. That’s higher than pre-pandemic (when it was 20.2%) but it’s again fallen from the previous quarter.
Meanwhile, employers are desperate to hire more people. The number of job vacancies rose to 1.034 million in the three months to August. That is the first time ever that the figure has gone above one million.
In short – more and more people are returning to work; the proportion of “discouraged” workers is falling all the time; and employers are still really struggling to find people.
Add that all up, and it’s no wonder that wages are shooting up. The ONS finds that weekly earnings (including bonuses) rose by 8.3% in the quarter to July 2021, compared to last year. Excluding bonuses, the figure was 6.8%.
Now, we have to take those figures with a big pinch of salt. They are distorted by the fact that lots of people lost their jobs (or went on reduced hours) a year ago. In other words, the average individual isn’t getting an 8% pay rise (which is one reason why pensioners aren’t getting one this year either). Instead, we’re seeing a big rebound whereas at the same time last year we saw a collapse. This is known as a “base effect”.
However, that said, after carrying out various adjustments, the ONS still reckons that underlying annual earnings growth is coming in at between 3.6% and 5.1%. Even at the lower end of that range, that’s significantly above the current inflation rate.
So we don’t even need to reach for the “anecdata” stories about employers offering £1,000 sign-on bonuses and the like to conclude that wage growth is strong.
One way or another, investors now have to consider inflation in their plans
To be very clear, it’s good news that wages are going up. It shows that the economy is in pretty good shape, which is quite something when you consider that it has been shut down to varying degrees over the past 18 months.
And at a deeper level, capital has been benefiting at the expense of labour for several decades now. This swing in the pendulum is arguably a continuation of a pre-pandemic trend – one of diminishing globalisation and increasing discontent among workers whose wages have lagged rising asset prices.
This is also arguably the best way to improve productivity. The ability to rely on a cheap pool of global labour has enabled entire industries to shape themselves around arguably inefficient ways of doing things.
As labour gets more expensive, companies will have to spend more on automating and roboticising tasks that could and should have been automated a long time ago.
In turn, that’ll create better, higher value jobs in lots of areas that we still can only really guess at. We’ll be doing more with less, which is the only way to make economic progress.
Of course, there’s a “but” here. Even if we get “good” inflation – that is, a rapidly growing economy alongside rising but not unhinged prices – that’ll still have significant implications for investment markets which have been shaped by four decades of disinflationary growth.
So investors just have to be aware of how rising inflation could affect their asset allocation and the fundamentals of their portfolio.
And if we get “bad” inflation – that is, inflation getting out of control, and possibly accompanied by stop-start growth, exacerbated by all of the supply problems we have and possibly by worker unrest – well, that’s a much uglier situation altogether.
In the next issue of MoneyWeek magazine, out on Friday, economist Philip Pilkington writes about the labour shortage and its potential impact on inflation. The 1970s comes up more than once. You won’t want to miss this one – if you haven’t already subscribed, get your first six issues free here.
Until tomorrow,
John Stepek
Executive editor, MoneyWeek
