U.K. Jobs Conundrum Continues

By: A. Thomson & I. Billington

LONDON—The U.K. labor market continued to display a puzzling resilience with the total number of unemployed people falling by the largest amount in more than 10 years, official data showed Wednesday, but weak wage growth means the rise in employment is unlikely to boost consumer spending.

The Office for National Statistics Wednesday said the unemployment rate, which is compiled in line with standards set by the International Labor Organization, fell to 7.8% in the three months to October, from 8% in the three months to July. The number of unemployed people fell 82,000 during the period to 2.51 million—the largest fall since the three months to May in 2001.

The U.K. labor market has confounded economists as it hasn’t deteriorated as much as expected despite the weak economic conditions. A decline in industrial production data last week, coupled with poor trade figures and disappointing business surveys, have all suggested the U.K. economy may shrink again in the final three months of the year.

“The productivity puzzle continues,” said George Buckley, U.K. economist atDeutsche Bank DBK.XE +0.45% . “Employment has reached a record high despite the level of gross domestic product remaining well below its prerecession peak, by some 3%, with total hours worked almost back at their previous highs.”

The total number of people in employment rose by 40,000 in the three months to October compared with the three months to July, to reach a total of 29.6 million—the highest number of people in employment since records began in 1971. However, economists pointed out that the 40,000 increase is considerably lower than the 100,000 rise in the previous three-month period.

“Ongoing growth of employment is by no means assured,” said Chris Williamson, chief economist at data firm Markit. “The latest rise in employment was the smallest since the start of the year, reflecting a steep easing in private sector job creation. The hiring trend looks to have started to slow. The business mood appears to have grown darker as economic forecasters have become gloomier about prospects for the U.K. economy, meaning companies will become increasingly reluctant to hire at the same time that the public sector continues to cut head counts.”

The ONS said average earnings rose 1.7% in the three months to October from the 1.9% increase in September. Economists were expecting a 1.9% increase in regular earnings, which excludes bonus payments.

The data show wages continue to be substantially lower than the annual rate of inflation, which jumped to 2.7% in October, meaning household incomes continue to be squeezed, dampening the prospects for consumer spending.

“Weak earnings growth remains the trade-off for the relative strength of the employment numbers,” said Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club. “It is going to be difficult to generate much momentum behind this consumer recovery until earnings start growing again in real terms.”

The Bank of England’s Chief Economist Spencer Dale said in a speech Wednesday that wage growth is still too fast relative to companies’ poor productivity and needs to slow if inflation is to cool.

“To the extent that the weakness in productivity persists, domestic cost pressures are not likely to ease materially unless private sector wage growth slows from its already muted rates,” Mr. Dale said.

Employment Minister Mark Hoban said Wednesday’s data show the labor market continues to be flexible, but said he continues to be cautious despite the figures.

“I’m very serious about the scale of the challenges facing the U.K. economy,” he said in an interview with the BBC. “There are huge challenges. We’re in a global race and we need to work harder to compete and keep people in work.”

The data come after the Office for Budget Responsibility, the government’s official forecaster, last week cut its estimate for the unemployment rate, saying it will now peak at 8.2% in 2013/14. Its previous forecast predicted the rate would peak at 8.7% this year.

The ONS also published data Wednesday showing the number of people employed in the public sector fell 24,000 in the third quarter to reach 5.7 million—the lowest total since the first quarter of 2002.

In comparison the number of people employed in the private sector increased 65,000 to hit 23.9 million—the highest amount since records began in 1999.

The news will be welcomed by the coalition government, which has been banking on the private sector creating more jobs than are lost in the public sector due to the continuing austerity drive.

The ONS said the number of Britons claiming unemployment benefit fell 3,000 in November to 1.6 million. The claimant count rate was unchanged at 4.8%. Economists had forecast the number of people on the jobless benefit would increase 7,500 in November.

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