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Lack of UK labour slack points to wage acceleration

Lack of UK labour slack points to wage acceleration

Insight

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05 December 2017

Key points

  • UK wage growth has been subdued since the financial crisis.
  • Although the headline unemployment rate has indicated that the labour market has been tight for some time, we argue that a broader measure of UK labour slack better explains this wage growth weakness.
  • We constructed a broader measure of UK slack, along the lines of the US ‘U6’ measure of unemployment, but additionally included employees on zero-hours contracts.  
  • Unlike in the US, inflation expectations do not appear to have been a material driver of wage growth. In the UK expectations may be better anchored. This may reflect a longer period of inflation targeting or a persistently higher UK inflation resulting in less deflationary concerns.
  • We model UK wage growth based on this broader measure of UK labour slack and longer-term trends in productivity growth.
  • This model suggests a more visible acceleration in wage growth over the coming years.
  • Anecdotal evidence from the Bank of England (BoE) suggests regional companies are preparing to raise wages more quickly. We believe future BoE interest rate hikes will only materialize after some confirmation  of this outlook.
  • We forecast the BoE tightening monetary policy only once in 2018, most likely in August.

Similarities in US and UK labour markets

With more central banks starting to tighten monetary policy or reduce stimulus, the question of how persistent subdued inflation trends will prove, has risen in importance. We recently published research1 showing that a Phillips Curve trade-off between labour market slack and wage growth still appears to exist in the US, once allowing for exceptionally low recent inflation and more slack in the labour market than captured by the headline unemployment measure (Exhibit 2). In this note, we conduct a similar analysis of the UK.

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1 Page, D., “Leaving subdued US inflation behind”, AXA IM R&IS insights, 13 October 2017.

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