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UK unemployment to rise and prospects for pay look gloomy

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Written by: Paloma Kubiak
15/05/2017
The UK labour market will face a rockier period over the next few years with unemployment rising and pay growth remaining subdued, according to a consultancy firm.

The economy has held up better than expected since last summer but there are signs the pace of expansion is slowing, according to EY ITEM Club.

It said this will feed into weaker demand for workers, with employment falling for the first time since 2009.

The consultancy firm said the number of people in work is set to increase by just 0.6% this year – down from 1.4% in 2016 – before shrinking to 0.1% in 2018.

Overall, EY ITEM Club said growth in the economically-active population is forecast to slow from 0.9% to 0.4% this year. As a result, it expects the unemployment rate to rise from 4.8% this year to 5.4% in 2018 and 5.8% the following year.

The latest labour statistics from the Office for National Statistics (ONS) showed there were 31.85 million people in work during November 2016 and January 2017 while a total of 1.58 million people were not in work.

Turning to the prospects for pay, the report stated that average earnings growth is expected to pick up marginally to 2.75% in 2017 with pay continuing to rise at a similar rate through 2018 and 2019.

But this figure is well below the levels seen before the financial crisis and prospects for growth in real, inflation-adjusted pay look “less bright”.

Rises in consumer prices in both 2017 and 2018 are expected to be close to growth in cash pay, meaning there’s negligible growth in real earnings.

It said that technology and automation are two possible headwinds facing pay growth over the longer term as machines could displace some workers. While a digital revolution is likely to boost the supply of labour competing for other jobs, EY Item Club said it will put downward pressure on wages in more labour-intensive and low-productivity sectors where machine advances are less applicable.

Martin Beck, senior economic adviser to the EY ITEM Club, said: “The UK labour market may be starting to become a victim of its own success. As the proportion of people in work has climbed ever higher, firms may have found it more difficult to fill vacancies, resulting in greater utilisation of the existing workforce and slower jobs growth.

“On a positive note, slower growth in the workforce may deliver a boost to what has been a long period of insipid productivity growth. With the flow of potential workers slowing, firms are likely to have more incentive to invest in improving efficiency or labour-saving technology.

“Rising employment and falling unemployment have yielded a record low jobless rate, but this has yet to translate into any meaningful boost to pay growth. In explaining this, a shift towards less secure and, on average, less well-paid, part-time and self-employed jobs may have dampened workers’ willingness to push for higher wage demands.”

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