Wage Bargaining Weakens As Labour Market Slack Continues

New data released by the Office for National Statistics has shown that unemployment held steady at 7.7% in the three months to April – unchanged from the previous month to March. However, the claimant count – a timelier measure of unemployment -rose by 19,600 over April, above consensus expectations of a 7,000 increase. This reflects a dip in hiring intentions amongst employers in the service sector over April – as shown by the Markit/CIPS Purchasing Managers’ Index over this month. Further signs of temporary slack in the labour market are evident in a marked fall in the typical number of weekly hours worked during April, which registered 31.2 – down 0.6 hours from the three months to January 2011.

The lack of activity in the labour market, along with fundamental weaknesses in consumer spending, provided little support for wage growth in April. Average earnings growth slowed by 0.6 percentage points to 1.8% in the three months to April compared to the three months to March. The fourth consecutive rise in the claimant count does not provide much support for a pick up in earnings growth, whilst the growth in employment seen over the last three months is by no means broad-based.

Employment grew by only 0.3% over the three months to April. The latest figures show that this increase is driven by modest growth in service sector jobs, which added 175,000 jobs to the payroll in the three months to March. Employment in manufacturing and construction fell by 11,000 and 24,000 respectively over the same period. This is in line with the widely reported slowdown in manufacturing and construction activity reflected by the latest Purchasing Managers’ Index data.

The information release bolsters cebr’s view that there is still plenty of slack in the labour market as the private sector has failed to create enough jobs to make a significant dent in the rate of unemployment. Employers are still reluctant to recruit as such, we expect the unemployment to remain elevated for the remainder of 2011 and the Bank of England to keep rates on hold for the whole year as economic conditions continue to be challenging.

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