Employment rises, but wage growth slows

18th March 2015

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January saw a marked increase in employment, but earnings growth weakened, resulting in a dip in sterling’s value against the euro and the dollar today.

The latest official data shows that earnings growth was 1.8% in the three months to January, down from  2.1% in the three months to December.

However, the labour market is currently seeing solid improvement. In particular, employment rose by 143,000 in the three months to January to a new record high of 20.939 million – this indicates that employment growth has actually picked up recently after slowing in the latter months of 2014 as employment had been up by just 37,000 in the three months to November.

In addition, the number of claimant count unemployed fell by a solid 31,000 in February after a drop of 39,400 in January.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “This does raise some question marks about just how robust earnings growth will be over the coming months. There is the possibility that a number of employers could use very low inflation as a reason to limit pay 2015 increases; this could potentially stretch some workers when inflation moves back up.

“Nevertheless, annual average earnings growth of 2.1% in the three months to January is still 1.8 percentage points above consumer price inflation of 0.3% in January so consumers are seeing a marked pick-up in their purchasing power.”

He added: “How earnings develop over the coming months will play a crucial role in just when the Bank of England starts to raise interest rates. The faster that earnings rise, the greater the likelihood that the Bank of England could still hike interest rates before the end of 2015, despite the possibility of near-term deflation.”

Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX, said:  “Today’s employment data and Bank of England minutes sent the pound tumbling against the dollar and the euro as they reconfirmed that UK rate rises remain some way off into the future. With average earnings slowing from 2.1% to 1.8% and the Bank of England highlighting the potential impact on inflation of the stronger pound, it seems highly unlikely that there will be any rate hikes this year.

“The pound fell by around 1% to 1.3830 against the euro and by a similar amount against the dollar to 1.4670 – its lowest since June 2010. All eyes will now be on the Federal Reserve this evening to see whether the weaker economic data and stronger dollar will lead them to signal a delayed timeframe for the first rate hike which is expected in June.”

 

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