Sinead Moore 15 Feb 2017 03:51pm

UK employment hits record high but wage growth slows

The UK labour market edged towards “full capacity” in the final quarter of 2016, but rising prices have reduced pay growth to its lowest level in almost two years, according to the latest labour market figures from the Office for National Statistics (ONS)

The total number of people in work increased by 37,000 to 31.84 million in the fourth quarter of 2016, while unemployment remained broadly unchanged from the previous quarter (1.60 million). Meanwhile the number of job vacancies remained flat, at around 750,000, the jobs data revealed.

There were 23.29 million people working full-time, 218,000 more than for a year earlier. There were 8.55 million people working part-time, 84,000 more than for a year earlier.

Employees increased by 163,000 to 26.82 million, self-employed people increased by 125,000 to 4.8 million, unpaid family workers increased by 30,000 to 129,000 and people on government supported training and employment programmes fell by 15,000 to 86,000.

UK nationals working in the UK increased by 70,000 to 28.44 million compared to Q4 2015 while non-UK nationals working in the UK increased by 233,000 to 3.48 million. Additional data revealed the number of EU workers in the UK fell to 2.24 million in Q4, compared to 2.26 million in Q3.

According to the ONS, the employment rate reached 74.6% in Q4 2016, after six consecutive months of growth, the highest since comparable records began in 1971.

ONS commentary added that the labour market is now edging towards “full capacity”.

However, real pay growth fell to 1.4%, in December, its lowest level since January 2015.

John Philpott, an economist and labour market analyst, said, “The ONS commentary suggests the labour market is now edging toward full capacity. But if by this they mean the market is now quite tight this still isn’t showing up in the pay figures.”

“With UK consumer price inflation picking up, UK workers are thus beginning to face another bout of downward pressure on real pay, which may depress overall economic growth in the course of 2017,” Philpott warned.

Laura Gardiner, senior policy analyst at the Resolution Foundation, added, “Today’s figures show the jobs market remains robust, with employment reaching a new record high and inactivity starting to fall again.

“However, the encouraging news on jobs isn’t feeding through into earnings, which have shown no sign of responding to fast-rising inflation.”

Gardiner warned, “Unless this changes Britain is set for a fresh pay squeeze later this year.”

The Resolution Foundation's latest pay projection following today’s figures shows that with inflation rising sharply, real pay growth is set to fall to around 1% next month, less than half the pre-crisis average of 2.2%.

Rachel Smith, CBI principal labour market economist, also raised concerns over “stubbornly sluggish” pay growth given rising inflation.

John Hawksworth, chief economist at PwC, added, “Average earnings growth, which had been edging up in recent months, eased back slightly to 2.6% in the fourth quarter.

"With wage growth relatively subdued and consumer price inflation now up to 1.8% and set to rise further towards 3% by the end of 2017, the healthy real earnings growth we saw in 2015 and most of 2016 could soon be a thing of the past.

“This is likely to take the edge off consumer spending growth later this year and into 2018, which has been the main source of resilience in the UK economy since the Brexit vote.”

Smith added, “There are tentative signs that productivity is picking up, but there is further to go before it can underpin faster wage growth.”

“Companies will be looking to the Budget to see adjustments to business rates along with measures to boost educational performance, helping firms to drive faster productivity growth.”

However, Philip Hammond said the labour market statistics were “encouraging”.

Nigel Meager, director of the Institute for Employment Studies, added that the figures suggest that anticipated employer nervousness about Brexit “has yet to show up in any real fall in hiring activity”.

“It seems safe to conclude, over six months on, that the labour market has been almost entirely resilient to any uncertainty following the referendum vote,” he said.

“However, very little has actually happened yet in economic, policy or legislative terms, and what has happened (in particular the fall in Sterling) has, if anything, given the economy and labour market a short-term boost.

He added, “It is certainly still too early to conclude that a substantive impact will not appear once clarity emerges regarding migration rules, trading and tariff arrangements, and employment regulation in the run-up to Brexit itself."

Hawksworth added that the figures suggest businesses have become a bit more cautious about hiring since the Brexit vote, but not cautious enough to push up the unemployment rate.

Philpott said, “There is little sign that the labour market is yet being affected by an exodus of EU born workers following the EU referendum result.”

“Given seasonal factors the number of EU born people working in the UK was more or less flat at around 2.3 million in the second half of last year, and in the final quarter of 2016 was 188,000 higher than in the corresponding quarter of 2015.

“While this may suggest the UK is no longer the draw it once was for EU migrants, Brexit has yet to trigger a big EU labour exit.”

However, Gardiner warned, “The small fall in EU-born workers in employment reminds us that the UK labour market outside of the EU will be very different to the one many employers have become accustomed to, and that now is the time to start preparing for that change.”