Jessica Fino 17 May 2017 01:04pm

Employment rises in Q1 but pay growth falls behind inflation

Unemployment in the UK has fallen to its lowest level since 1975, while the proportion of people employed is at its highest in 46 years

According to the Office of National Statistics (ONS), there were 31.95 million people in work in March, which was 381,000 more than a year earlier and 120,000 more than for October to December 2016.

The figures signal businesses have continued to recruit people despite the uncertainty over Brexit.

The employment rate was at 74.8% during the first quarter of the year, the highest proportion seen since comparable records began in 1971.

Meanwhile, the unemployment rate fell to 4.6%, the lowest in 42 years, with a total of 1.54 million people not in work.

Despite Brexit, the number of non-UK nationals working in the country increased by 207,000 to 3.55 million. There were 28.31 million UK nationals working in the UK, an increase of 179,000.

However, pay growth is now lagging behind inflation for the first time in two years, with average weekly earnings adjusted for price inflation falling by 0.1% including bonuses and 0.2% excluding them.

Without adjusting for price inflation, wages increased by 2.4% and 2.1% respectively.

The ONS said on Tuesday that inflation stood at 2.6%, the highest it has been since June 2013.

Air fares - due to the timing of Easter - along with prices for clothing, vehicle excise duty and electricity contributed to the increase.

Andrew Sentance, senior economic adviser at PwC, welcomed the employment growth seen in Q1, but said the figures contained “mixed news for future UK economic prospects”.

Sentance said, “The pick-up in employment growth is encouraging. But the fact that wage growth is not keeping up with price inflation does not bode well for consumer spending - which has been a key factor contributing to UK economic growth in recent years."

Martin Beck, senior economic advisor to the EY ITEM Club, warned that the “buoyant performance” seen in the labour figures do not translate into upward pressure on pay.

He warned that, with inflation rising, real regular pay fell for the first time since late 2014.

“The positive news is that there still appears to be scope for joblessness to drop further before pay rises threaten higher inflation. But will that slack be absorbed? The squeeze on real pay augurs a slowdown in consumer spending, which in turn risks pushing unemployment up and depressing pay growth. So the latest numbers may be as good as it gets for the labour market for now,” he added.

Meanwhile, Suren Thiru, head of economics at the British Chambers of Commerce (BCC), warned that it remains likely that employment growth will start to soften over the near-term, as more subdued economic conditions and the rising cost of doing business in the UK stifle firms’ ability to recruit.

“If the disparity between pay and price growth continues to increase as we predict, household spending is likely to slow further, weakening overall economic activity."

Thiru urged the next government to do more to close the skills gap, including improving the transition from education to work by "guaranteeing universal experience of work in all schools for under 16s", and delivering a future immigration regime based on economic need, rather than an arbitrary migration target.

Meanwhile Alpesh Paleja, CBI principal economist, warned that weakening productivity and slower pay growth, coupled with rising inflation, will continue to squeeze real household earnings.

"Therefore maintaining the UK’s reputation as a great place to do business, for example by increasing R&D spend to 3% of GDP by 2025, will help boost the UK’s productivity. This is the only sustainable route to higher wages, and better living standards," he added.

The Resolution Foundation said on Wednesday pay growth is set to remain below inflation throughout most of 2017.

Stephen Clarke, economic analyst at the Resolution Foundation warned that the new phase of falling pay means this decade is on track to be the worst in more than 200 years for pay packets.