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Employment Keeps Going Up, But Why Are We Producing Less?

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For quite some time now we've seen the UK labour market impress, with evidence that more jobs are being created month after month. This follows yet another stellar set of figures recently showing jobless claims fell far more than expected and the number of people employed hit another record high. You can say that some of these figures are massaged somewhat, with record employment as a result of a growing population, but the trend is far from being in doubt; the UK labour market is about the only bright spot going for our economy right now.

The major issue is that as unemployment falls there's no corresponding pick up in output. Our economy shrunk in the last quarter of 2012 and is on the cusp of a so-called "triple dip" recession, if it does indeed see a contraction in first quarter of 2013, which is not the current market consensus. Even if Q1 of this year does see a rebound in growth it means that the economy is still limping along rather than showing any real signs of recovering, as you would expect with the creation of more jobs.

There may be more of us working, but in real terms we're all working for less. Wages are not growing anywhere near as much as inflation and in fact the most recent data showed they rose at their slowest rate of growth since June 2010. Companies are happy to employ people but are paying them less which means the labour force isn't being as productive as would otherwise have been the case when wages are rising faster. We also have to remember that the UK has an economy that is very much reliant on the consumer. Inflation is currently far higher than wage growth and this has been the case for quite a few years now. Real incomes are declining as a result and if the consumer's feeling poorer in real terms, then they're not going to splash out in the shops. With a vital part of the overall UK economy not firing on all cylinders, as evidenced recently by persistently poor retail sales data, growth is going to be hard to come by.

So despite the labour market showing its remarkable resilience, this is unlikely to stop the Bank of England from turning off the money printing machines. Further quantitative easing is around the corner and that means a weaker sterling; that means higher inflation and so the squeeze on consumers is set to continue. It's a double-edged sword if ever there was one, but you have to agree, it's a better position to be in than the sort of sky high unemployment being suffered in other parts of the world, many of them only just across the Channel.

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