Unemployment up for the first time in two years, but wages also rise

15th July 2015


UK unemployment has risen for the first time in two years, reaching 5.6% in the three months to May, but pay for those with jobs increased by 3.2%.

Office for National Statistics data shows that May’s rate was up from 5.5% in the three months to February, but slightly lower than a year earlier when it was 6.5%.

There were 1.85 million unemployed people. This was 15,000 more than for the three months to February 2015, the first quarterly increase since January to March 2013.

Ben Brettell, senior economist at Hargreaves Lansdown, says: “These figures should not prove cause for concern. The pace of job creation has been expected to slow for some time, and the magnitude of today’s rise in unemployment is extremely small.

“Compared with a year earlier, there were 265,000 more people in work in the three months under review. We are seeing more of a plateau than a downturn in employment – to be expected as the economic recovery becomes more mature.”

Brettell says the exact reasons behind today’s small rise in unemployment are difficult to pinpoint, but one theory is that firms delayed hiring new workers in response to uncertainty surrounding May’s election. If that is the case, he believes we should see the labour market recovery continue in the coming months.

He says: “Wage growth figures also released today showed total pay (including bonuses) rose 3.2% compared with a year earlier, a marked acceleration from 2.7% the previous month.

“Excluding bonuses pay rose 2.8%, the biggest increase in six years. Combined with zero inflation, accelerating wage growth is good news for the UK consumer, which should in turn be good news for economic growth, which I expect to pick up during the second half of the year.”

Brettell warns that the Bank of England  will be watching the labour market closely for signs that ‘slack’ in the economy is being taken up before raising interest rates.

Wage growth is thought to be a particularly important indicator. Subdued wage growth in the recovery thus far has signposted that the economy could grow at a faster rate without pushing up inflation, he explains.

“If the trend we are seeing in wages continues, or accelerates further, this could support the case for higher interest rates sooner rather than later. However, given the weak outlook for inflation I expect the Bank to err on the side of caution and leave rates on hold well into 2016,” Brettell adds.

Andy Scott, associate director at foreign currency specialists, HiFX, says: “Sterling dropped back on Wednesday following employment data that was weaker than expected, raising questions about the strength of the economy. Having risen by over one percent following comments from the Bank of England Governor yesterday on a rate rise moving closer, GBP/USD and GBP/EUR dropped by 0.5% to 1.5600 and 1.4150 respectively.

“Any signs that job creation is slowing is likely to temper expectations of the recent wage growth continuing, and could therefore weaken the argument made by a couple of BoE members that rates will need to be increased soon. We’ll need to see how June’s employment figures look, but if unemployment starts to tick up or wage growth stalls, Mark Carney may end up having to retract the comments  about a rate rise moving closer, just as he did had to do last year.”

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