UK Public Sector Lifts Wage Growth, Labour Market Loosening Continues

Summary

• The market may want to focus on the jump in wage growth to +8.2% YoY in June, but the details are far less hawkish.
• Public sector pay growth drove the jump in wages. This is less important to the BoE as it does not present a cost pressure to firms.
• Unemployment’s rise to 4.2% is far more important, especially as it is being driven by a decline in employment.
• Full-time employment dropped sharply again. The shift in employment composition will weigh on wage growth ahead.
• Labour market loosening is not losing steam, this will give the BoE less room to be hawkish come September.

Market Implications

• The market appears to have taken the data hawkishly. We disagree strongly. However, the time to fade this move could be tomorrow, if we were to see core inflation rise on repricings of rent.

Labour Market Loosening Continues

UK labour market data painted a net-dovish picture, in my opinion. That is because while wage growth shot up sharply to +8.2% YoY from a revised +7.2%, this was predominantly public sector driven (which is less concerning to the BoE). Meanwhile, the decline in full-time employment is gaining speed, which drove the rise in the unemployment rate to 4.2% (far beyond August MPR forecasts) and will suppress wage growth ahead. As we have long expected, the labour market is outstripping MPR expectations. It leaves the newly detail-oriented BoE less room to be hawkish in September.

So far, the market has taken the labour market data hawkishly, with 2Y Gilt yields rising 8bps. The temptation to fade this is strong, but tomorrow’s CPI release will be a much more important driver. There, I see room for a positive surprise in core CPI on the back of higher rents. If that occurs, and the market shifts further hawkish, it would be a very good opportunity to fade the move.

Unemployment Ticks Up

UK ILO unemployment rose to 4.2% in July, significantly beating consensus (4.0%). In line with our expectation, this is a significantly faster loosening of the labour market than the BoE’s MPR had forecasted (Chart 1). In fact, the MPR had not forecasted a 4.2% unemployment rate until Q2 2024. At the same time, the unemployment/vacancy ratio (a number the BoE watches closely) rose to 1.4x in June, a level not seen since August 2021 (Chart 2). We expect both to continue on this path ahead with corporate hiring difficulties continuing to decline and job vacancies likely to further normalise.

Taking a closer look at the numbers, rising unemployment is being driven by a sharp slowing in employment rather than just a rise in the participation rate (that is, people trying to find a job).

In fact, full-time employment growth is falling at a faster rate than at any time since the financial crisis (Chart 3). Meanwhile, the growth in part-time roles is keeping the headline figures buoyed. Its post-COVID growth rates have been relatively unprecedented, but the data has tended to be far more volatile. Part-time workers are easier to let go, or wind down, meaning two things:

• the labour market is not as strong as headline figures suggest,
• the headline figures could deteriorate very quickly on retrenchment of part-time hiring.

And while the participation rate marginally dropped in June, this is likely monthly volatility. We expect participation will stay high due to the pressures on household savings ratios (Chart 2).

The relative direction of the labour force towards part-time labour has implications for wages, too. The ONS’ calculation of employment composition’s contribution towards wage growth remains strongly positive (albeit slightly less so than in May, Chart 4). With employment shifting to part-time (lower weekly wages all else equal), this should correct ahead – history shows this correction can be very rapid.

Focus on the Private Regular Pay Growth

Wage growth remains very high. At +8.2% YoY total pay, and +7.8% regular pay, it is significantly above consensus (+7.4% for both). However, it is less hawkish than the market may first think. For one, NHS pay rises (predominantly one-offs) are the big driver of the total wage growth beat. For context, total private pay growth dropped 1.6ppt to +7.0% in the month, while public sector pay growth rose 10.2ppt to +16.5% (Chart 5).

The most important factor, private regular pay growth, continued to rise but with less concerning momentum than in headline pay growth (Chart 6). The MPR’s 6% year-end forecast for private regular pay may seem unrealistic right now, but the trajectory is not actually so unrealistic – it would require a MoM change in weekly wages to drop to around £2 from £3 in June (Chart 7). Helping this case would be if we were to see the compositional factors turn negative ahead (as we expect). This would, without any change in like-for-like wages, mean that the median wage was lower.

Henry Occleston is a Strategist, who focuses on European markets. Formerly, he worked in European credit and rates strategy at Mizuho Bank, and market strategy at Lloyds Bank.

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