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UK unemployment at 42-year low, but wages lag

Paloma Kubiak
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Paloma Kubiak

The number of people in work rose in the three months to July 2017 but real wages – adjusted for inflation – have fallen by 0.4% compared to a year earlier.

The employment rate for the period was 75.3%, the highest since comparable records began in 1971, according to the Office for National Statistics (ONS).

There were 32.14 million people in work during May to July 2017, 181,000 more than the preceding three months and 379,000 more than recorded in the previous year. The rise has been partly fuelled by the highest female employment rate since 1971.

Unemployment over the three months was 4.3% down from 4.9% recorded a year earlier, with a total of 1.46 million people not in work. This level is the lowest since 1975 and is 75,000 fewer than for the three months to April 2017. It’s also 175,000 fewer than for a year earlier.

While the labour market data shows positive signs, average weekly earnings for employees in real terms (adjusted for inflation) fell by 0.4% (including and excluding bonuses). However, in nominal terms (not adjusted for inflation), average weekly earnings increased by 2.1%. Economists had expected average pay growth including bonuses to tick upwards to 2.3%.

The average total pay for employees (including bonuses) was £505 a week, up from £498 a week a year earlier, while average regular pay (excluding bonuses) was £474 per week before tax and other deductions, up from £465 in the previous year.

‘Pay shrinking in real terms’

With yesterday’s inflation figures showing prices rising at 2.9%, this means pay is still shrinking in real terms, according to Ben Brettell, senior economist at Hargreaves Lansdown.

However, he said: “The Bank of England predicts wage growth will rise to 3% next year, while inflation falls back towards the 2% target. The first part of that equation looks optimistic to me. The only sustainable driver of real wage growth is increasing productivity – and in this respect the UK continues to lag behind its developed-world counterparts, notably the US and Germany.

“Unless a solution to this productivity puzzle is found, a meaningful improvement in living standards could be some way off.”

Ed Monk, associate director for personal investing at Fidelity International, said lagging wages makes it more likely the Bank of England will look through rising inflation when it decides on interest rates this week.

“Prices are rising above target, which creates the case for raising rates, but today’s wage data suggests all is still not right in the economy. With interest rates unlikely to be being hiked anytime soon, we need our savings and investments to work even harder as we wait for that elusive pay rise,” he said.