Is the Labour Market Turning?

National Institute of Economic and Social Research (NIESR) hosted the Business Conditions Forum (BCF) on 14th August. The aim of the BCF is to have informed and analytical discussions of data and surveys to better understand the current state of the UK economy. The discussions are held under Chatham House rules to encourage free and open discussion. NIESR is grateful to the ESRC and the Impact Accelerator Award (IAA) for funding the BCF.

Is the labour market turning?

The first special topic for the August 2019 BCF was whether the UK labour market was turning.  Was the slowdown in employment growth evidence of a slackening of demand for labour or was there no longer much supply available?

Background

The latest ONS data published on 13 August provided tentative evidence of some weakening in labour demand, but strong wage growth suggested that the labour market remained tight.  Employment had continued to grow, but that was driven by self-employment.  At the same time, the number of vacancies had been softening since the start of the year and the vacancy-unemployment ratio, an indicator of labour market tightness, had dropped quite sharply in the latest data.  Annual wage growth had picked up to 3.9 per cent (excluding bonuses) in the three months to June, partly on the back of increases in public sector pay and the national minimum wage, but this was expected to ease back to 3½ per cent in the next three-month period (see NIESR Wage Tracker).  With productivity falling in the latest official data, unit labour costs were 4 per cent higher in the three months to June than a year earlier, the fastest growth rate since 2009.

The August KPMG/REC Report on Jobs, compiled by HIS Markit, also provided some tentative evidence from recruiters of a weakening in labour demand.  There was evidence of subdued hiring as the number of people placed into permanent jobs fell for the fifth month in a row.  This was partly attributed to businesses putting off hiring decisions until there was more clarity about Brexit.  Consistent with the vacancies data, the growth of demand for staff was at a 6-year low.  And there were signs that pay growth may have peaked.  Pay pressures had been pushing up starting pay levels, but this had edged down in recent months.  On the labour supply side, there were reports that candidate availability had fallen due to people not wanting to change jobs in view of the uncertain outlook.

Importance of Brexit uncertainty

There was a question about the importance of Brexit uncertainty in explaining a slackening of labour demand when there was also a weakening in labour demand in other countries too.  The evidence was that employment growth globally was the lowest for 2½ years.  This was mainly in manufacturing where jobs were falling at the fastest rate since 2012.  UK employment growth in services in the year to date was weaker than in other countries, consistent with some amplification from Brexit uncertainty.   And Brexit is mentioned by many recruiters in explaining deferred hiring decisions in the UK.

Relatedly, the Deloitte CFO survey had asked chief financial officers to rank their concerns and Brexit came out on top.  But there had been a marked increase in concern about geopolitics and trade.  There was also a lot of concern about balance sheet metrics and margins being put under pressure by increasing operating costs and decreasing revenues.

Evidence from the Bank of England Agents showed that employment intentions had weakened due to Brexit related uncertainty.  On the labour supply side, people were perceived to be unwilling to move from secure jobs.

Skill shortages

The CBI surveys highlighted that concerns about skill shortages had not abated.  In the financial sector, hiring intentions had been strong but not matched by outturns.  There was some evidence that the employer response to skill shortages had changed.  Whereas the previous narrative had been that businesses would hire people below the required skill level and then train up the new recruits, businesses were now reported to be turning to automation in response to skill shortages.  Others had also noticed employers turning to artificial intelligence and automation.

Other participants expressed scepticism about the extent of skill shortages.  It was noted that the latest labour market data had shown pay growth in the ICT sector slowing to 2 per cent per annum, not consistent with skill shortage.

It was reported that employers in the construction sector were taking advantage of funds available from the Apprenticeship Levy to train staff.  There had initially been doubt about how effective the Apprenticeship Levy would be, but many employers were realising that it could be a lever to fill vacancies.  More generally, hiring intentions in the construction and infrastructure sectors were quite strong, though they had moderated a little.  Businesses had reported that while they were not going ‘full throttle’ they had continued hiring despite Brexit uncertainty.

Pay growth

As far as pay settlements were concerned there were substantial structural changes going on and circumstances may move to a situation where some areas are ‘hot’ and others ‘cold’.  Median settlement growth had continued at 2½ per cent per annum, but there had been an increase in pay growth at the upper quartile in services, indicating that businesses that could afford to pay more for staff were doing so.

It was also thought that the change in public sector pay policy would be influential.  Public sector pay restraint when the labour market had been tight had helped stabilise pay growth at a low rate.  But this policy was now dead and that would remove an important element keeping pay growth low.  Employers now saw pay pressures increasing and planned to respond in a targeted way, increasing pay in certain market segments, but not across the board.

Pay growth in the public sector was increasing, but this would not necessarily help address skills shortages.  For example, increasing nurses pay would not have much effect on the supply of nurses which was determined more by the number trained.  Similarly, for specialist teachers.  Pay would be more significant in attracting prison officers.  Importantly many of the pay increases have not been budgeted for, so there will be a knock-on effect on public services.

Beyond the labour market: no-deal Brexit

With the next Brexit deadline only weeks away, what is the state of readiness amongst businesses this time?

The level of preparedness varies depending on the size of the company, sector and exposure to the EU. According to the Decision Makers Panel, some 57 per cent of firms consider Brexit as one of the top 3 risks. Yet, only 70,000 export licences out of a possible total of 240,000 have been issued. In other words, the general level of preparedness is quite low even though Brexit is thought to be an important risk. Large companies, particularly in the financial and the automobile sector, have been preparing for different Brexit scenarios since 2016 and are ready, but smaller companies are less well prepared.

There is no evidence of stockbuilding yet. This could be because companies are waiting for more clarity ahead of the October 31st deadline or simply because it is too early to stockpile. There are also reports of a shortage in warehouse space for the period around end-October because of seasonal Christmas demand.

On one view, there is more worry about a Labour government led by Jeremy Corbyn than a hard Brexit.

The meeting was chaired by Amit Kara, with Garry Young (NIESR), Annabel Fiddes (IHS Markit) and Arno Hantzsche (NIESR) also leading discussions. A total of 17 organisations were represented which covers all the major survey organisations and policy making departments/institutions. The next meeting is scheduled for 13th November.