UK unemployment rate falls more than expected but wage growth slows

Unemployment in the UK fell more than expected in the third quarter, figures released on Wednesday showed, though wage growth also weakened, leading many economists to the conclusion that a near-term rise in Bank Rate was still uncalled for.

According to the Office for National Statistics (ONS), the unemployment rate declined to 5.3% in the three months to September, compared with a 5.4% reading a month ago and 5.6% in the second quarter, beating analysts’ expectations that it would hold steady.

The rate of people claiming unemployment benefits remained steady at 2.3% as analysts had expected, but the number of jobless claims rose by 3,300 compared with a forecast for 1,400.

Meanwhile, the number of people currently employed rose by 177,000 to 31.2m, compared with a 140,000 gain in the previous quarter and with analysts’ expectations for a 120,000 reading.

However, despite the improvement on the employment front, there was less positive news in terms of wage growth.

"The uneven jobs report will do little to clarify when the Bank of England will hike interest rates" - Howard Archer, IHS Global Insight

Earnings excluding bonuses rose 2.5% year-on-year in the quarter, down from the 2.8% advance in the previous three months and missing forecast for a 2.6% gain.

Total pay growth, meanwhile, remained steady at 3% as bonuses surged 15%, but fell short of the expected 3.2% reading.

ONS statistician Nick Palmer noted that the unemployment rate was at its lowest since spring 2008.

Some economists said the diminishing slack in the labour market, indicated that the Bank of England should not wait too long to raise interest rates, but others said the weaker earnings data meant a rate rise should be pushed back.

Economists divided on need for rate rise

Sam Tombs at Pantheon Macro said the strong market figures indicated that the Monetary Policy Committee "can't wait another year to raise interest rates, as markets expect, if it wants to prevent inflation eventually overshooting its target".

"There’s now precious little slack in the labour market. The unemployment rate is now in line with its average in the decade prior to the 2008 recession, while economic inactivity among working-age adults has never been lower."

However, Vicky Redwood at Capital Economics said the data showed a fairly solid labour market, but not one strong enough to warrant an interest rate rise soon.

"There was more evidence that the falls in employment earlier this year were just a blip," she said, adding that the
"crucial" element for the interest rate outlook was that wage growth was a bit weaker than expected.

Although the headline three-month average growth rates held up, annual growth of overall average earnings in September fell from 3.2% to 2.2%, Redwood added.

"Ex bonuses, annual growth fell from 2.6% to 1.9% - well below the rate consistent with meeting the inflation target.
Overall, then, these figures will cement expectations that a rate rise is still some way off," she said.

Howard Archer of IHS Global Insight summed it up well, saying that the "uneven" jobs report "will do little to clarify the uncertainty over exactly when the Bank of England will hike interest rates".