Unemployment rate rises as wage growth slows

Wages grew at the slowest rate in more than two years over the past quarter but at a slightly faster pace than expected, denting the chances of another interest rate cut by the Bank of England next month.
Pay growth excluding bonuses across the UK economy averaged 4.8 per cent in the three months to September, down from 4.9 per cent in the previous quarter, according to figures from the Office for National Statistics (ONS). Analysts had expected regular pay growth to hit 4.7 per cent.
Including bonuses, salaries increased by 4.3 per cent on average in the past three months, up from 3.9 per cent in the previous three months, the agency said.
Unemployment rose to 4.3 per cent in the quarter, up from 4 per cent in the previous three months. Economic inactivity — when someone does not have a job and is not looking for one — slipped to 21.8 per cent, the lowest level in nearly a year.
Britain’s economic inactivity problem is an outlier among rich countries, which have largely seen their labour force participation rate rebound to pre-pandemic levels. Vacancies slid by 35,000, or 4 per cent, to 831,000, the ONS said, a three-year low and down from a peak of 1.3 million in 2022.
Economists have warned that employers will rein in hiring thanks to the 1.2 percentage point increase to national insurance contributions announced at the budget last month.
Policymakers, most notably those at the Bank of England, have attached less value to the ONS’s monthly unemployment numbers owing to a sharp drop in responses to the underlying survey that generates the headline data.
Instead, they have turned to alternative private sector surveys to extract information on employment trends in the UK economy. The monthly earnings numbers are yielded from separate data that is thought to be more accurate.
The Bank’s chief economist, Huw Pill, said the labour market data showed inflation pressures in Britain remained too high for the central bank’s 2 per cent inflation target. “Pay growth remains quite sticky at elevated levels and levels that, given the outlook for productivity growth in the UK, are hard to reconcile with the UK inflation target,” he said.
The Bank of England keeps close tabs on trends in the labour market to determine the future direction of interest rates. Its ratesetters pay particularly close attention to salary growth in the private sector, which the ONS said was unchanged at 4.8 per cent. Public sector wages grew by 4.7 per cent.
Last week the central bank’s nine-member monetary policy committee voted 8-1 in favour of lowering interest rates by 25 basis points to 4.75 per cent, the second quarter-point cut this year.
Committee members have repeatedly said that lower wage growth is required to ensure that inflation stabilises at their 2 per cent target over the long term.
After last week’s monetary policy committee meeting, analysts said that it was less likely that the Bank of England would deliver another quarter-point cut at the next meeting next month after its economists said that Rachel Reeves’s budget would be mildly inflationary for the economy in the short term.
Reeves announced a 6.7 per cent increase in the minimum wage at the budget, which analysts at Investec said could “provide a small boost to average wage growth across the whole economy”.
“However, there could be some offsetting impact from the increase to employer national insurance contributions, depending on whether employers opt to compensate for this increase in labour costs, at least in part, by lowering wage growth for non-living wage staff”, they added.
Analysts at Nomura, the Japanese investment bank, said that the stronger-than-expected wage data “might be just rogue figures in an otherwise declining trend”.
“If so then as weaker data are accumulated over the next two reports that should provide room for the Bank of England to cut rates again in February — continuing their quarterly cuts,” they added.
Markets are betting interest rates will be held at 4.75 per cent next month.
The pound fell by 0.39 per cent against the dollar on the new labour market data to $1.281, while the yield on the ten-year benchmark UK government bond edged up to 4.445 per cent.
Liz McKeown, director of economic statistics at the ONS, said the agency continued “to advise caution when interpreting short-term changes in these estimates, as the improvements to data collection introduced at the beginning of the year are still feeding through”.
McKeown said: “Growth in pay excluding bonuses eased again this month to its lowest rate in over two years. Pay growth including bonuses increased, but for recent periods these figures have been affected by last year’s one-off payments made to public sector workers.”
There are budgets that unravel slowly and then there are those that unravel quickly.
In 2012, George Osborne, David Cameron’s chancellor of six years, was dealt a bruising blow from the uproar sparked by him imposing a flat 20 per cent VAT rate on hot foods, such as sausage rolls and Cornish pasties.
By May, Osborne had reversed the policy. He was, to all intents and purposes, ambushed by a pasty.
Rachel Reeves’s inaugural budget is drawing a mounting wave of anger from employers and economists almost daily, but not for the chancellor’s desire to mend the public finances.
The £40 billion tax increase — on some measures the largest at a single budget ever — was necessary to channel cash into fraying public services. The public wants better healthcare, schools and a functioning legal system.
In fact, these tax rises in effect just reversed the public spending cuts laid out by the previous Conservative government, which Richard Hughes, chairman of the Office for Budget Responsibility, described as a work of “fiction” at the time.
Instead, the rising criticism of Reeves is aimed at the way in which the chancellor has chosen to raise more revenue for the Treasury. The 1.2 percentage point increase to employers’ national insurance contributions — now up to 15 per cent from 13.8 per cent — could net a huge £26 billion.
However, that yield is likely to be lower, about £16 billion, owing to employers curbing pay increases to offset a higher tax bill and stalling recruitment activity altogether. Data from the Office for National Statistics on Tuesday showed that the labour market is weakening already, with vacancies down to a three-year low of 831,000.
The NICs rise also threatens to be inflationary if businesses think that they can recuperate greater tax outlays by raising prices.
The Bank of England said last week that, with consumer demand weak, price increases may not work, leaving lower wage growth or corporate profits as the main channels via which the NICs increase will be absorbed.
Sainsbury’s, BT Group, hairdressers, care homes and the Night Time Industries Association, among others, have all warned that the NICs change risks stoking unemployment, depressing wage growth and curbing vacancies. The chancellor also slashed the threshold when NICs payments kick in to £5,000 from £9,100, leaving low-paid workers the most vulnerable to paltry pay rises.
Tax rises were necessary to help public services. The chancellor could, however, have chosen something more palatable.