There was an oddity in the latest data on the UK labour market out today. In a way, you could say it doesn’t add up.

Economists call it the Phillips Curve. It’s an economic theory that has underpinned economic policy since the late 1950s. It is meant to show an inverse relationship between inflation and unemployment. The higher the level of unemployment, the lower the rate of inflation, and vice versa.

Recent data appears to be throwing a rather large hole in the theory, and today (March 15th) that hole got an awful lot bigger.

UK unemployment fell to 4.7 per cent in the three months to January, according to the ONS. That was the joint lowest rate since 1975. Employment rose by just 92,000.

Yet growth in average wages fell from 2.6 per cent in December to just 2.2 per cent in January.

It means that the gap between inflation and wage growth is getting very small. Soon, maybe next month, perhaps the month after, but probably no later than the summer, inflation will be rising faster than wages. Meaning real wages start falling. That will not be good for households, it won’t be good for the UK consumer sector.


But why?

Why is wage growth slowing while employment rises and unemployment falls?

The Bank of England monetary policy committee (MPC), which is responsible for setting interest rates, has suggested that the UK equilibrium rate of unemployment is 4.5 per cent, meaning that unemployment can fall to this low level – by historic standards – without sparking off inflation.

But Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics reckons that the data report suggests that the equilibrium unemployment rate could be even lower than this.

Scott Bowman, UK Economist at Capital Economics pointed out that "the rise in employment was driven by self-employed workers and government training jobs rather than employees. "

Then again, and on a more optimistic note Mr Bowman said: "We think that this labour market tightness will result in a rise in nominal average earnings growth over the coming months and, therefore, real wages should avoid significant falls. What’s more, ongoing increases in employment and rock-bottom interest rates will probably support overall household disposable incomes, preventing consumer spending growth from slowing too much this year.”

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