The second quarter of 2017 saw the UK unemployment rate drop to 4.4%, the lowest it has been since 1975. Additionally, the Office for National Statistics stated that employees’ total earnings (including bonuses) rose by 2.1% in a three-month period until June. Despite what financial analysts forecasted with last year’s Brexit, employment in the UK is doing quite well.
The Weakness of Sterling
So, what is really causing this incentive for employment in the UK? It can all generally be traced back to the weakness in the price of the pound sterling. Since Brexit last year, the slump has spurred business and boosted multinational companies listed on the UK’s FTSE 100 to benefit from earnings in currencies stronger than the pound. This, in turn, has improved productivity and thus required the hiring of more employees.
Britain’s Benchmark Index
The Financial Times Stock Exchange 100 index (FTSE 100) is a list of the top one hundred companies in the London Stock Exchange with the highest market capitalization. The FTSE 100 is calculated by using the total market capitalization garnered from the individual share prices of the companies. As share prices change, so do index values. Recently, the FTSE enjoyed its longest run of record closes in the past 20 years (since 1997). In 2016 the FTSE 100 made gains of 14.4pc making it the best year since 2009. The idea that this index is doing better than it has in decades is a strong indication of why UK unemployment is down considerably.
Slow Wage Growth
The bad news is that wage growth is still slow to catch up. Unlike previous economic cycles were job rates were low, competition is currently high and there is no scarcity in the job market. Thus, there is no motivation to increase wages. Although inflation has eased since May (when it hit a record 2.9%) wages have been slow to improve. The plus side is that now 15% of the UK’s labor market is self-employed so people have more control over the type of work they are performing. The nature of work has changed and now it is up to the government to respond accordingly with laws to protect freelance employees.
Outsourcing and Migration
Another factor that can affect the unemployment rate in the UK is the ability of employers to hire cheap labor from overseas. Despite last summer’s referendum, migration has not ceased in the UK. In the first quarter of 2016, non-UK nationals from the EU working in the UK rose by 171,000 to 2.32 million. This trend has seen the number of employees from the EU double since 2009, which can also account for the rise in employment. There are simply more people and thus more available skilled labor to employ.
The job market is currently flourishing with 777,000 jobs advertised from February to April, indicating the job market will continue to grow as these positions are filled. Currently, there are 31.95 million people employed in Britain, with only 1.54 million out of work (the lowest since 2005). It is expected that as inflation begins to fall back in the upcoming year, pressures from the drop in the pound will start to fade and wages will grow once again. The strong demand for labor will eventually push employers to pay more. The Bank of England predicts that wages will start to rise as unemployment falls to 4.5% and less.
Although it was surmised that the UK would experience a financial crisis from Brexit, so far, the signs point to quite the opposite. The shift in politics has spurred the job market and created a stronger economy. Although wages are currently not matching inflation, it is expected to equalize by next year, while the job market will continue to grow. Eventually, wages will meet the demand needed as a healthy economy is a productive one… and Britain is well on its way to becoming a byword for both.