19th February 2014 by The Harried House Hunter
In recent times the UK Office for National Statistics has developed the habit of releasing economic data virtually on top of each other with little delay. Yesterday we had a whole sequence of inflation numbers -which used to be on different days- and today we move to the labour market. Actually this reminds me of a piece of past economic theory called the Phillips curve.
In economics, the Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. Stated simply, lower unemployment in an economy is correlated with a higher rate of inflation.
Sadly for William Phillips this is not the situation in the UK. Only yesterday we observed that inflation has been falling since last summer and if we move to unemployment we note that the unemployment rate has fallen as well from 7.8% to 7.2% over the past year. I hope that his fellow Kiwis will forgive me for pointing this out and anyway cricket fans over there will still probably be basking in the glow of Brendon McCullum’s triple century.
The Bank of England steps in
This is a long way from the first time that the original Phillips curve theory has been challenged by the evidence. Back when I was a student the rational expectations revolution combined with the work of Milton Friedman gave us a long-run and short-run Phillips curve. Here we find something else which will be part of the UK economic releases today as the Bank of England has joined the economics data rush with its minutes. This is relevant to the debate because it has been estimating the medium-term equilibrium rate of unemployment which implies a Phillips curve style of analysis.
The latest inflation report told us this about the unemployment rate.
medium-term equilibrium rate of 6%–6½%.
As an aside there is an obvious contradiction here between that number and the 7% unemployment rate used as the original Forward Guidance threshold is there not? Not only did they choose the wrong target they got the level wrong too! Now spot the change from last August.
That suggests a medium-term equilibrium rate of around 6½%
So it has been nudged lower in a way that they may have hoped would not be spotted. How far could it go? Well there is this.
Evidence on job-finding rates and job creation suggests that the natural rate was just over 5% in the run-up to the 2008/09 recession . Since then, it is likely to have been broadly flat.
I would not be surprised to see the medium-term equilibrium unemployment rate described as 6% in this August’s inflation report. Or to put it another way from the latest inflation report.
There is uncertainty about the medium-term equilibrium unemployment rate.
Well downwards uncertainty anyway…..
This is being presented as a surprise but readers of the comments section here will be aware of the argument that the sequence of very good unemployment rate numbers had overshot reality.
The unemployment rate for October to December 2013 was 7.2% of the economically active population, down 0.4 percentage points from July to September 2013.
Actually the single month of December was at 7.2% which means that next time around as the 7% of October drops out then January will have to be a particularly good reading to push the number lower.
As ever the forecasting department of the Bank of England was unable to miss the opportunity to be wrong. From only a week ago.
The headline LFS rate is projected to have remained at around 7.1% in December.
If they are continuing to define ‘around’ as being ‘below’ they did even worse.
What does this mean?
If we look to some of the other data we should be reassured that the trend here is still the unemployed’s friend.
There were 2.34 million unemployed people, down 125,000 from July to September 2013.
The employment rate for those aged from 16 to 64 for October to December 2013 was 72.1%, up 0.3 percentage points from July to September 2013. There were 30.15 million people in employment aged 16 and over, up 193,000 from July to September 2013.
Those who follow my theme that it is employment that is the driving force and leading indicator here will be cheered to learn that the employment rate rose to 72.3% in December.
So whilst the headline unemployment rate raises a concern the underlying picture remains good and we see another indicator of this below.
Total hours worked per week were 966.8 million for October to December 2013, up 4.0 million from July to September 2013 and up 18.9 million on a year earlier.
Let’s hear it for the girls
For October to December 2013, 67.2% of women aged from 16 to 64 were in work (the highest figure on record), up from 66.5% a year earlier and 65.4% two years earlier.
It would be going to far to say that the fairer sex is solely responsible for the UK economic recovery but they are certainly a powerful agent in it.
What about wages?
There was a possible hint of better times here too.
Between October to December 2012 and October to December 2013, total pay for employees in Great Britain rose by 1.1% while regular pay rose by 1.0%.
Only a smidgeon but upwards at least. If we look into the detail there was more room for optimism as the figure for total pay in December alone was 1.5%. However some care is needed as this was driven by an 8.1% rise in private-sector bonuses for that month. So whilst it was good that UK employers were shelling out for year end bonuses these of course by their very nature are likely to wither away in January.
Real wages continue to fall
We are being assaulted in the media by a barrage of assertions about real wage growth that some may already believe that they are rising. But sadly they are not. So far falling inflation has done much more for them than rising nominal wages. We have had a recovery for a while now and yet real wages are still falling at an annual rate of 0.8% if we use the official consumer inflation measure (CPI) and by 1.7% if we use the Retail Price Index.
Should the exchange rate of the pound continue to be strong then I expect some relief for real wages from further inflation falls. But so far the official figures are picking up only weak improvements in nominal wages. There would be food for thought indeed if this situation carried on and even sustained economic growth brings few real wage benefits.
It is perhaps too soon to declare an apocalyptic new era but it does feel that for a given economic reality real wages have shifted downwards and this phenomenon is being seen in plenty of places outside the borders of the UK as well as within it.
Is the Bank of England a dictatorship now?
The release of the monthly minutes was missing something.
The Governor invited the Committee to vote on the propositions that:
- Bank Rate should be maintained at 0.5%;
- The Bank of England should maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.
Regarding Bank Rate, the Committee voted unanimously in favour of the proposition.
Regarding the stock of purchased assets, the Committee voted unanimously in favour of the proposition.
Under the era of Forward Guidance these were of course fait accomplis as we wonder what they actually do at each monthly meeting. Well they did not appear to be able to find the time to vote on Forward Guidance 2.0 did they? Perhaps the supine way in which the other eight members of the Monetary Policy Committee behave with regards to the introduction of Forward Guidance as they rushed forwards shouting “Eureka! Me too sir!” has made Mark Carney think that votes are unnecessary now.
Or perhaps policy is now longer made at the monthly MPC meetings which would be a downgrade for the (part-time) external members who might find themselves there on the wrong days. Oh and this implies a change in UK monetary structure and governance on the quiet.
If we look below the somewhat disappointing headline unemployment rate number for the UK we see that the situation continues to improve overall. Even wages have nudged a little higher. However there has been a quantum shift between the behaviour of quantity (employment-good) and price (wages-weak) over the credit crunch period. Accordingly I think it is too easy to project wages forwards in a Buzz Lightyear “Too infinity! And beyond” style. Yes we hope and to some extent expect a pick-up but how far will it go?
Meanwhile it would appear that one particular Quango -the MPC- could help with reducing government spending by removing the eight members who currently appear surplus to policy.