U.K. Unemployment And Wage Growth - No Room, Absent No Deal Brexit, For Bank Of England Cuts

by: Tim Worstall

U.K. unemployment has been at generational lows for some time now. Employment to population ratio at highs.

We've not been seeing wage growth though - this has just changed and markedly.

Given the likelihood of imminent inflation it's unlikely, absent a no deal Brexit, that we'll see the Bank of England loosening monetary policy.

The Brexit Economy

The biggest determinant of the immediate future of the British economy remains Brexit. Will it happen at all, if it does when and what will be the precise arrangements? But underneath that we'd like to know how it's doing on its own. The answer there being much better than anyone thought given the uncertainty around that first issue, Brexit.


Unemployment has been at generational lows for some time now. This is continuing:

UK unemployment (UK unemployment rate from ONS)

As you can see unemployment is down to where it was before that post-war Keynesian economic settlement started to come apart. From that one number alone we'd imagine we're in the middle of a boom. Of course GDP growth doesn't show that but that's another matter.

The UK unemployment rate was estimated at 3.8%; this is lower than a year earlier (4.0%) and unchanged on the quarter.

Again, absent any other numbers we'd say the country is at full employment.

Employment To Population

Unlike the US there is no thought that some significant portion of the population would like a job but are so discouraged that they simply don't look for one. The employment to population ratio is at again generational highs:

Employment to population (Employment to population ratio from ONS)

We again think we're at full employment:

The UK employment rate was estimated at 76.1%; this is the joint-highest on record since comparable records began in 1971, and higher than a year earlier (75.5%).


The thing is, as even Karl Marx was sensible enough to point out, if we've no unemployment then wages should be rising strongly. Because if there are no unemployed then to gain more workers an employer must tempt them from some other job. The most obvious manner of doing so being to offer higher wages. This hasn't been happening and a certain concern is, well, why?

My own view on this is that the reserve army goes home to Krakow and other cities in Central Europe. But that's a rather controversial thought even if it does match the facts. The uncertainty over Brexit has meant that the UK isn't an attractive place to move to for work as the right to do so could be imminently withdrawn. Thus, finally, the low unemployment rate is feeding through into wages. Maybe.

But something is definitely feeding through into wages:

Estimated annual growth in average weekly earnings for employees in Great Britain increased to 4.0% for total pay (including bonuses), and fell to 3.8% for regular pay (excluding bonuses).

UK pay (UK pay from ONS)

It is of course the lower two lines, real incomes, that matter.

Putting It Together

As Moody's analytics points out:

The U.K.'s jobless rate fell to 3.8% in the July quarter after it ticked up to 3.9% in the June stanza, in line with our expectations and the consensus. The details indicated that employment rose by 1.1% y/y over the quarter, only a little lower than the 1.2% average rise for the past year, while unemployment fell for the third stanza in a row. The key detail of the report was that wage numbers were stellar; headline pay growth picked up to 4% y/y over the quarter, its strongest in more than 11 years, while regular pay growth remained strong at 3.8%.

My View

Quite why the low unemployment, high economic participation rate, have only just now turned into significant real wage rises is the puzzle here. As I've said above I think this is because of the absence of economic immigration from Central Europe. That being the one thing that has changed recently, all this Brexit uncertainty.

The Investor View

We've two things to consider with the British economy. One is simply, well, how's it doing? The other is what is going to be the effect of Brexit if it ever happens. The answer to the first is just fine. In fact, it looks to be working as it should for the first time in years. Low unemployment leading to significant wage growth. That in turn will feed through into rising consumer demand and perhaps even a bolus of business investment to chase it. The virtuous spiral of economic growth that is.

Thus there's no reason for the Bank of England to be loosening monetary policy or lowering interest rates. Nor boosting QE and all that.

The other question, Brexit, well, we're just going to have to wait and see about that. But without that the UK economy is doing just fine.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.