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Squeeze on real wages continues but employment on the up

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Written by: Paloma Kubiak
24/01/2018
The employment rate rose to a new high while average weekly wages, adjusted for inflation, fell 0.2% in the year to November 2017.

The employment rate between September and November 2017 was 75.3%, up from the 74.5% recorded a year earlier, and the joint highest rate since records began in 1971, according to the Office for National Statistics (ONS).

There were 32.21 million people in work, 102,000 more than for June to August 2017 and 415,000 more than for a year earlier.

Unemployment over the three months came in at 4.3%, down from 4.8% for a year earlier. Again, this is the joint lowest rate since 1975. In total, there were 1.44 million unemployed people, 160,000 fewer than recorded in the previous year.

While the labour market shows positive signs, wages continue to be stretched.

Average weekly earnings for employees in nominal terms (not adjusted for inflation) increased by 2.5% including bonuses, and 2.4% excluding bonuses compared to a year earlier.

However, when taking inflation into consideration, average weekly earnings for employees in real terms fell by 0.2% including bonuses and 0.5% excluding bonuses.

This means wages still lag inflation which was recorded at 3% for December.

Ben Brettell, senior economist at Hargreaves Lansdown, said in theory, with unemployment so low, sooner or later demand for labour will outstrip supply and workers will be able to demand higher wages.

“But the number of job vacancies also hit a record high, signalling that employment could increase further before an imbalance of supply and demand starts to push wages up at a more meaningful pace. There also seems to be a more fundamental shift in the labour market, with new technology and global competition both weakening workers’ bargaining power. It looks like low wages now explain low unemployment, rather than low unemployment acting as a catalyst for better pay.”

Brettell added that with pay growing at 2.5% but inflation running at 3%, the squeeze on real wages continues for the ninth consecutive month.

“But with inflation seemingly set to fall back towards the 2% target, this looks like it’ll come to an end in the next few months. We should remember, however, that the only true driver of real pay growth and rising living standards is productivity growth. This is something the UK has struggled with since the financial crisis, and as yet nobody seems to have solved the puzzle.”

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