UK pay growth is picking up strongly, consistent with the historical relationship with the job openings or vacancy rate*, a measure of labour market tightness. This relationship suggests a continued upswing through mid-2016, at least.
The three-month smoothing of average weekly regular earnings (i.e. excluding bonuses) rose by 2.7% in the year to April, the largest annual increase since February 2009. Total earnings and earnings per hour also grew by an annual 2.7%. Hourly earnings had been lagging the weekly measure (i.e. employees’ average weekly hours had been rising) but the gap closed in April – see first chart.
A post in September argued that weekly regular earnings growth, then below 1%, was about to rise significantly, since the job openings rate had surged over the prior two years and had almost regained its pre-recession peak, indicating a tight labour market – see second chart, which is reproduced from the earlier post. The Bank of England and consensus view, by contrast, was that hidden slack (e.g. a large number of part-time employees wishing to work full-time) and rapid labour supply expansion would limit upward pressure on pay.
The weakness of earnings growth in 2013-14 seemed to support the consensus view that the job openings rate was overstating labour market tightness. The two series had turned down simultaneously in 2008 so their divergence in 2013-14 suggested a structural break in the relationship.
As noted in the earlier post, however, the openings rate led earnings growth by between six and 12 quarters at turning points in the 1970s and 1980s – third chart. The simultaneous fall in 2008, therefore, was unusual but the divergence between weak earnings growth and a surging openings rate in 2013-14 was not.
The current earnings pick-up is consistent with the historical relationship. As noted in the earlier post, “the openings rate bottomed in 2009 but embarked on a sustained rise only in the second quarter of 2012. Based on the average nine-quarter lag following the three increases over 1970-90, this suggests an upswing in earnings growth starting in the third quarter of 2014.” Regular earnings growth has risen steadily from a low of 0.7% in the second quarter of 2014 – fourth chart**.
The increase in pay growth is more impressive against a backdrop of falling / low consumer price inflation, which would be expected to subdue wage demands.
The job openings rate rose further in the fourth and first quarters, surpassing its 2008 peak, though has since fallen slightly. If the first quarter were confirmed to be a peak, the minimum six-quarter lead in the 1970s-80s would suggest a continued uptrend in earnings growth through the third quarter of 2016, at least.
*Vacancies as a percentage of employee jobs plus vacancies.
**Quarterly data except for the last data points, which refer to the latest three months.
