UK labour market showing signs of losing steam - EY ITEM Club

The UK labour market is set to face a rockier period over the next few years with unemployment rising as the consequences of a slowdown in economic growth bite and pay growth remaining subdued, according to the EY ITEM Club special report.

While economic activity has held up better than expected since last summer, there are signs, particularly in the consumer sector, that the pace of expansion is slowing.

According to the EY ITEM Club, this will feed into weaker demand for workers resulting in UK employment falling for the first time since 2009. Having risen by 1.4 per cent in 2016, the report says that the number of people in work is set to increase by a modest 0.6 per cent this year, before shrinking 0.1 per cent in 2018.

However, the report argues that the consequences of an ageing population and lower levels of immigration for the supply of workers will cushion the impact of softer labour demand on the unemployment rate. Overall, growth in the economically-active population is forecast to slow from 0.9 per cent to 0.4 per cent this year. As a result, the EY ITEM Club expects the unemployment rate to rise from 4.8 per cent this year to 5.4 per cent in 2018 and 5.8 per cent the following year.

Martin Beck, senior economic advisor 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.”

The EY ITEM Club special report says that average earnings growth is expected to pick up marginally to 2¾ per cent in 2017 with pay continuing to rise at a similar rate through 2018 and 2019. This will remain well below the norm prior to the financial crisis. And prospects for growth in real, inflation adjusted pay look even less bright. Rises in consumer prices in both 2017 and 2018 are expected to be close to growth in cash pay, implying negligible growth in real earnings.

Mr Beck, continued: “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.”

The report identifies technology and automation as possible headwinds facing pay growth over the longer term. With the potential for technology and machines to displace some workers, the digital revolution is likely to boost the supply of labour competing for other jobs, putting downward pressure on wages in more labour-intensive and low-productivity sectors where machine advances are less applicable.

Mark Gregory, EY’s Chief Economist, said: “With labour supply expected to slow, businesses need to take a closer look at their future skills needs. They will need to assess how to strike the right balance between allocating capital on skills development, labour savings and labour enhancing technology. This will ensure that they have a workforce fit for their future business strategy.”

Mr Beck added: “The prospect of a rise in unemployment and pay growth remaining weak means that the case for the MPC to keep monetary policy on hold for a prolonged period is a strong one. Meanwhile, our expectation that a revival in pay growth is unlikely will be bad news for the public finances and present another challenge for whoever takes the reins of economic policy after the election.”