THE BLOG

Improving Labour Market Gives UK Recovery Real Momentum

13/06/2013 17:05 BST | Updated 12/08/2013 10:12 BST

The question mark that has hovered over the UK's economic recovery for some time now has centred on the progress of the labour market. UK unemployment is high by historical standards - it currently sits at 7.8% with the average generally taken to be around 6.5% since the early 1970s. That said, this is nothing compared to most of our European counterparts.

France's unemployment rate is 10.8%, Italy's sits around 12% whilst Spain has to endure the fact that 1 in every 4 of its citizens are out of work. Our rate of unemployment is very similar to that of the US and therefore the overall question remains - why, with only a slightly worse rate of employment than average, are we still seeing such sluggish growth in Britain?

Firstly, there has been a large difference between how these three distinct areas have attacked the downturn. The Europeans have gone for, or in certain cases have been forced to implement fiscal tightening, in an attempt to bring down debt and deficit levels. In the ECB, they have a central bank whose monetary policy has not been as supportive as some others.

Here in the UK we have had austerity as well, but very loose monetary policy from the Bank of England in the form of ultra-low rates and £375bn of asset purchases via its quantitative easing program.

In the US, they have had the 'best of both worlds' - loose monetary policy from the Federal Reserve and, until recently, a relatively supportive government position towards spending.

Secondly, and most importantly in my eyes, is the story around wages. Nominal wages - wages not adjusted for inflation - have fallen dramatically in the past five years with the Institute of Fiscal Studies saying that these falls have been the worst in the modern age.

The fact that workers have been happy to take savage pay cuts in real terms (i.e. once the effects of inflation are factored in) to save their jobs has meant that unemployment has stayed relatively low whilst productivity, and the inherent link with output, has suffered.

Today's unemployment numbers are not strong enough to definitely say the recovery is well on its way, but the figures are encouraging. Employment is higher after two poor months, claims of job insurance have fallen for the 7th month in a row and, most importantly, for the first time since August of last year, we have seen an increase in wage growth - and one which doesn't include the lumpy effects of bonus payments.

Public sector employment - the key line item for deficit reduction - fell by 22,000 to the lowest level since December 2001 with private sector employment increasing by 46,000 to a total of 24.1m. The wage growth numbers are still poor but it shows that the slowing in growth may be at an inflection point. We cannot really celebrate this until wages are growing faster than inflation; they currently lag by 1.5% year on year.

Whilst these improvements are minor in the grand scheme, the change in trend has to be welcome and, if these conditions are maintained, then growth and higher wages should be just around the corner.