The latest labour market data contains some encouraging news on pay. But we're still a long way off from a return to pre-downturn employment levels in some parts of the UK.
Today’s employment statistics – our last opportunity of 2014 to judge the performance of the UK labour market – may represent a gear-change from the story we’ve been telling for most of this year.
The pay rise that many expected in 2014 – but that has eluded us so far – has finally arrived, with real regular pay growth in the year to October. Meanwhile rapid employment growth appears to be slowing, in part because self-employment numbers are now falling. Such shifts in direction offer clues of what could happen to pay, employment and the changing nature of work next year.
The arrival of real pay growth has led to talk about a pay recovery. The Bank forecast implies real wage growth of 1.8 per cent by the end of 2015, compared to one per cent growth implied by the OBR’s figures. Clearly, there is considerable uncertainty over prospects for pay, but neither point to a long-overdue rebound in real wage growth above the pre-downturn trend of two per cent. This is despite expectations for below-target inflation next year.
Even the lower OBR growth forecast requires considerable improvement on the 0.2 per cent real pay growth we currently have. How likely is this? We will need a step up in pay settlements – with the three per cent rise in the National Minimum Wage this October possibly providing a benchmark – as well as a shift in the kind of jobs being created, away from the lower-skilled occupations such as caring and cleaning that characterised 2014.
Quarterly employment growth averaged above 200,000 in the first half of 2014, but has slowed to around 80,000 more recently. One of the key drivers of recent employment growth has been increased labour supply due to welfare reforms and a rising state pension age, combined with concerns about retirement savings, prompting people to work for longer. There’s every chance these drivers will continue to push employment up next year. On the other hand, if strong productivity growth continues to elude us then firms may have limited ability to continue to take on more staff.
If employment does continue to grow, an important secondary question will be how such growth is distributed across the UK’s regions and nations, half of which have yet to regain their pre-downturn employment rates.
Self-employment growth has defined the recovery, accounting for around two thirds of the net employment change since 2008. But having peaked in mid-2014 self-employment levels have tailed off since, falling by 73,000 in the four months to October. It’s too early to tell whether this represents a blip in the upward trend or a corner turned, but it’s worth considering that Resolution Foundation analysis into recent self-employment growth concluded that some of the increase could be attributed to cyclical factors such as weak employee vacancy levels. This suggests that self-employment may start to fall back next year if the labour market continues to strengthen.
These questions will loom large over 2015. Earnings will increase again after a six-year squeeze. But an economic recovery without productivity growth and stronger wage rises will lack the feel-good factor and make the tough fiscal challenge facing the next government even harder.
Laura Gardiner is the Resolution Foundation's senior economic analyst
