UK employment picked up strongly in May but wages continued to drag their heels well behind the rate of inflation and economists disagreed over what it means for the Bank of England's next interest rate moves.
Weekly earnings growth excluding bonuses nudged up to 4.3% from 4.2%, according to figures from the Office for National Statistics on Tuesday, which was as predicted by economists and means negative real wage growth continued, with consumer price inflation at 9.1% and expected to hit 11%.
Employment was 296,000 higher in the three months to May than in the previous three months, which was much stronger than the 170,000 expected, though the headline unemployment rate held steady at 3.8%.
Including bonuses, growth in average weekly earnings decreased to 6.2% in May, from 6.8% in April, which was lower than the consensus forecast.
The figures continue to suggest a “mixed picture” for the UK labour market, said ONS head of labour market and household statistics David Freeman.
“The number of people in employment remains below pre-pandemic levels and, while the number of people neither working nor looking for a job is now falling, it remains well up on where it was before COVID-19 struck.
“With demand for labour clearly still very high, unemployment fell again, employment rose and there was another record low for redundancies.
“Following recent increases in inflation, pay is now clearly falling in real terms both including and excluding bonuses. Excluding bonuses, real pay is now dropping faster than at any time since records began in 2001.”
Economists disagree
Ahead of the next interest rate decision by the Bank of England's monetary policy committee (MPC) on 4 August, economists argued over whether it means a rate hike of 25 or 50 basis points was most likely.
Economist James Smith at ING said the UK jobs market “remains tight, even if it is no longer tightening”.
In practice, he felt this data “is unlikely to change many minds at the Bank of England when it comes to August's decision: hawks will stay concerned about worker shortages, while the doves will focus on the pick-up in shorter-term unemployment.”
For Sam Tombs at Pantheon Macroeconomics, the labour market “no longer is tightening, easing the pressure on the MPC to step up the pace of its rate hiking cycle. Labour supply is starting to rebound, now that the adverse impact of the pandemic on domestic participation and on immigration is fading.”
Offering an alternative view, Ruth Gregory at Capital Economics said the pick-up in wage growth "will add a bit more pressure on the Bank of England to raise interest rates by 50 basis points rather than the 25 basis points at the next policy meeting in August".
The rise in employment, she added, "suggests the weakening in GDP growth during Q1 has yet to weigh on jobs growth" and "by any metric the labour market is still very tight".
Tombs noted that timelier data show that labour demand is stabilising, with the official measures of job vacancies dropping for the second month in a row in early June, while the first estimate of payroll employee numbers in June was the lowest since March 2021 and would be expected to be revised to a small drop based on regular revisions over the last 12 months.
With surveys suggesting that wage growth is more likely to cool than rise further, Tombs said he continues to think “that the unemployment rate will start to drift up, reaching 4.2% by the end of this year, and that MPC’s fears of a wage-price spiral will not come to pass”.
At the EY ITEM Club, chief economic advisor Martin Beck said there was “little evidence that the combination of a tight labour market and high inflation is pushing up wage growth”, with regular pay growth “little more than half the rate of inflation” in the three months to May.
He added: “The prospect of inflation moving higher in the autumn means that the MPC is likely to continue raising interest rates at its next few meetings. But market pricing implying that Bank Rate will reach 2.75% by end-2022 (150bps of hikes across four meetings) looks overstated given the data continue to offer little evidence to validate the MPC’s concerns about the risk of second round effects of inflation via higher wage growth.
“The EY ITEM Club expects Bank Rate to finish the year at 2%.”