The latest unemployment figures have left ministers purring. Employment is at record levels, said Ian Duncan Smith. Unemployment is continuing to fall and wages are rising. All evidence that the government’s economic plan is working, according to the work and pensions secretary.
In truth, the latest news from the labour market is a bit more nuanced. More jobs are certainly being created. There were almost 31m people in work in the last three months of 2014, an increase of 103,000 on the previous quarter and up 608,000 up on October to December 2013.
Unemployment now stands at 5.7% and is getting close to the levels seen before the economy slipped into recession in 2008. Higher employment and a reduction in joblessness should mean that companies are having to compete harder to find workers from a shrinking pool of labour, with wage settlements rising as a result.
This, though, is not happening. The headline figure for average earnings certainly shows a pick up. They were 2.1% higher in the final quarter of 2014 than in the same three months a year earlier, up from 1.8% in the three months to November.
Evidence surely that the recovery in the economy over the past two years is finally feeding through into wage packets? Not so fast. The increase in average earnings was entirely the result of bonuses, paid only to a small segment of the workforce. Regular pay rose at an annual rate of 1.7% in the last quarter of last year, down from 1.8% in the three previous months.
So, yes, real wages are rising and living standards are improving. They are doing so, however, because inflation is falling rather than because earnings growth is accelerating.
With the general election less than three months away, the government will not mind where the real earnings growth comes from, just so long as there is some. Today’s data suggests, however, that the Bank of England is being optimistic in its forecast that earnings growth will be up to 3.5% by the end of this year. Indeed, the fall in inflation may lead to employers becoming less generous in their pay offers.
