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Monday June 26, 2006 - 09:36:14 GMT
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Economics Weekly: The conundrum of the UK labour market

Rising employment and unemployment
On the surface, data for the UK labour market appears to suggest that the economy is growing below its trend or potential pace of growth. But on closer examination, the picture is more complicated. This is important because the monetary policy implication of rising unemployment is for lower or unchanged interest rates. The opposite policy implication is inferred from rising employment. Yet, currently, both appear to be happening at the same time. What is going on?

Explaining the UK labour market conundrum…
The latest labour market report showed there was an increase in the number of people in employment and the employment rate rose. In the quarter to April, the employment rate went up 0.2 of a percentage point to 74.7% and the number of people in work went up by 130,000. For the same quarter, the figures also showed that the number unemployed and the unemployment rate increased. The unemployment rate was 5.3%, up 0.2% from the period before, whilst the number unemployed rose by 77,000. (Claimant, or benefit office derived unemployment, went up by 5,800 in May and the rate on this measure was 3%, the same as in the previous two months but 0.3% up on the same period a year earlier.)

But this leaves a net rise of 53,000 in employment in the last three months - the 130,000 jobs increase minus the 77,000 unemployed. In the year to April, the increase in employment was 272,000 and the rise in the number unemployed was 199,000, so leaving a net rise in jobs of 73,000 over the past year. This suggests that unemployment should be lower, not higher.

…jobs are being created but the workforce is growing even faster
But the number of people in the workforce needs to be taken into account, as it is used in calculating the rate of unemployment. Over the last year, the number of economically active people has risen by 470,000 or 1.6% to 30.542 million people. It is no wonder that the unemployment rate has risen. Jobs are being created, but not enough to account for those joining the labour force. The UK inactivity rate has fallen. Hence, the rise in unemployment seen over the last year is being driven by an increase in the workforce rather than by employment falling.

This is a positive for UK growth and a negative for wage inflation...
The net effect of this will be to boost overall growth in the UK. Part of the reason for the increase in the workforce has come from government efforts to get people off disability benefits and into work and partly from eastern European workers coming to the UK. One result of this increase in the workforce has been to lower wage inflation and so keep down price inflation and hence interest rates. The Bank of England calculated that this effect may have kept interest rates lower by up to 0.5 of a percentage point.

...but could still lead to a modest rise in interest rates
Given the government’s target to get 1-2 million people off disability benefits over the next few years, the workforce may swell further and wage inflation may be kept lower than otherwise. The good news is that a rise in employment should also boost economic growth. This chimes with our view that economic growth will accelerate and average 2.8% over the next two years, necessitating a rise in interest rates of around ½% over the year ahead.

Trevor Williams, Chief Economist
trevor.williams@lloydstsb.co.uk
www.lloydstsbfinancialmarkets.com
Lloyds TSB Bank,
Financial Markets
Division,
Faryners House,
25 Monument,
London EC3R 8BQ
Switchboard:
0207 283 - 1000

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