UK unemployment falls to 6.4% but outlook for wages “remains bleak”

13th August 2014

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UK unemployment fell to 6.4% in the three months to June from 6.4% the previous month according to the Office for National Statistics.

The number of people unemployed fell by 132,000 to 2.08 million. Yet despite this good news average wages rose by just 0.6% in the year to June, the slowest rise since records began in 2001.

Including bonuses, wages fell 0.2%, the first fall since 2009.

The Bank of England halved its forecast for average wage growth, saying it now expected average salaries to rise by 1.25% this year.

The Office for National Statistics says wages were affected by a high number of employees deferring bonus payments until after the top rate of tax was cut from 50p to 45p last year, skewing yearly comparisons.

Low average wage rises are an indication of the level of so-called “spare capacity” in the economy.

Spare capacity is the Bank of England’s measure of the extent to which the UK economy is underperforming, as a result of a lack of business investment either in hiring new staff, technology or machinery.

Ben Brettell, senior economist, Hargreaves Lansdown says: “The outlook for wages remains bleak, the Bank of England admitted today, with only a “modest increase” in prospect in the near term. The Bank cut its wage growth forecast in today’s Quarterly Inflation Report and now expects wages to rise by just 1.25% in 2014, down from 2.5% forecast in May. Estimates for productivity growth (a key determinant of wages) were also cut.”

The TUC says the the UK is now very good at creating low paid jobs.

TUC General Secretary Frances O’Grady says: “The combination of rising employment and falling pay growth suggests the economy is very good at creating low-paid jobs, but struggling to create the better-paid work we need for a fair and sustainable recovery.

“Self-employment has been responsible for almost half of the rise in employment over the last year. The fact that self-employed workers generally earn less than employees means our pay crisis is even deeper than previously thought, as their pay is not recorded in official figures.

“Falling unemployment is always welcome – particularly for young people who are finally starting to find work – but unless the quality of job creation increases Britain’s living standards crisis will continue and people will be locked out of the benefits of recovery.”

Discussing interest rate prospects Chris Williams, CEO, Wealth Horizon said: “Despite Carney’s assertions that the inflation increases will be gradual, there is still a lack of clarity over the timings of these and it is likely that bumpier times are ahead for investors as the market shifts back to “normality”.

“The modest increase in the rate of inflation and revised growth rate may bode well for the general economy, it is a mixed blessing for many ordinary households who have seen their finances stretched by the rising cost of living, while seeing real value shaved off their investments through inflation and stubbornly low interest rates.

“This will undoubtedly be a tough time for investors, but they can prepare themselves by considering investment products which protect them against market volatility.”

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