UK labour market showing signs of losing steam, says EY ITEM Club


15-05-2017

The UK labour market is set to face a rockier period over the next few years, with unemployment rising as the consequences of a slowdown in economic growth bite and pay growth remaining subdued, according to the EY ITEM Club special report on the labour market published today.

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  • Era of fast growth in employment set to end, with the number of people in work forecast to increase by 0.6% this year, but then shrink 0.1% in 2018
  • A softer economy will see the unemployment rate rise from 4.8% in 2017 to 5.4% in 2018 and 5.8% in 2019
  • Weaker expansion in the workforce could spur faster productivity growth, but prospects for pay look gloomy

While economic activity has held up better than expected since last summer, there are signs, particularly in the consumer sector, that the pace of expansion is slowing. According to the EY ITEM Club this will feed into weaker demand for workers, resulting in employment falling for the first time since 2009. Having risen by 1.4% in 2016, the report says that the number of people in work is set to increase by a modest 0.6% this year, before shrinking 0.1% in 2018.

However, the report argues that the consequences of an ageing population and lower levels of immigration for the supply of workers will cushion the impact of softer labour demand on the unemployment rate. Overall, growth in the economically-active population is forecast to slow from 0.9% to 0.4% this year. As a result, the EY ITEM Club expects the unemployment rate to rise from 4.8% this year to 5.4% in 2018 and 5.8% the following year.

Martin Beck, senior economic advisor to the EY ITEM Club, comments: “The UK labour market may be starting to become a victim of its own success. As the proportion of people in work has climbed ever higher, firms may have found it more difficult to fill vacancies, resulting in greater utilisation of the existing workforce and slower jobs growth.

“On a positive note, slower growth in the workforce may deliver a boost to what has been a long period of insipid productivity growth. With the flow of potential workers slowing, firms are likely to have more incentive to invest in improving efficiency or labour-saving technology.”

Prospects for pay look gloomy with automation an additional drag on pay rises

The EY ITEM Club special report says that average earnings growth is expected to pick up marginally to 2¾ % in 2017 with pay continuing to rise at a similar rate through 2018 and 2019. This will remain well below the norm prior to the financial crisis.  And prospects for growth in real, inflation adjusted pay look even less bright. Rises in consumer prices in both 2017 and 2018 are expected to be close to growth in cash pay, implying negligible growth in real earnings.

Martin Beck, continues: “Rising employment and falling unemployment have yielded a record low jobless rate, but this has yet to translate into any meaningful boost to pay growth. In explaining this, a shift towards less secure and, on average, less well-paid, part-time and self-employed jobs may have dampened workers’ willingness to push for higher wage demands.”

The report identifies technology and automation as possible headwinds facing pay growth over the longer term. With the potential for technology and machines to displace some workers, the digital revolution is likely to boost the supply of labour competing for other jobs, putting downward pressure on wages in more labour-intensive and low-productivity sectors where machine advances are less applicable.

Mark Gregory, EY’s Chief Economist, says: “With labour supply expected to slow, businesses need to take a closer look at their future skills needs. They will need to assess how to strike the right balance between allocating capital on skills development, labour savings and labour enhancing technology. This will ensure that they have a workforce fit for their future business strategy.”

Implications for monetary and fiscal policy

Martin Beck, concludes: “The prospect of a rise in unemployment and pay growth remaining weak means that the case for the MPC to keep monetary policy on hold for a prolonged period is a strong one. Meanwhile, our expectation that a revival in pay growth is unlikely will be bad news for the public finances and present another challenge for whoever takes the reins of economic policy after the election.”

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Martin Beck, the EY ITEM Club’s senior economic advisor, is available for broadcast and print interviews. Please contact Konstantinos Makrygiannis, EY media relations, on 020 7951 9263 / 07917 212 677
Follow us on twitter: @EY_ITEMClub
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