More good news today for low-income families, unless they want a pay rise

The Office for National Statistic’s monthly release of labour market statistics is an opportunity for economists and commentators to probe the state of the UK economy. Many Twitter characters have been spilt arguing if the figures presage faster wage growth, where employment may heading next, and what all this means for the Bank of England’s imminent decision on interest rates. However, today’s statistics (while they provide talking-points on all the above) show why a tight labour market is good for those on low-incomes.

Employment rose by around 130,000 in the three months to May compared to the previous quarter. The employment rate rose to 75.7 per cent (a new high), unemployment is at 40-year low and inactivity also remained at a record low. Furthermore (as the chart below shows) the vast majority of the jobs created in the past year are full-time roles, mostly taken up by women. The UK labour market is doing a good job at getting people into work, and, in the majority of cases, full-time work.

We’ve also seen a pronounced shift from inactivity into employment. Of the 230,000 people that moved into work in the first quarter of 2018 60 per cent of these people moved into work from inactivity. As a result the share of the economically inactive population that want a job has fallen to a record low (as the chart below shows).

As it has tightened greater numbers of people that tend to be loosely connected to the labour market (perhaps because of health problems or caring responsibilities) have moved into work. Many of these people will be in lower-income households. The chart below (sadly only available until the first quarter of 2017) shows that employment rates have increased most strongly towards the bottom of the income distribution since the crisis.

This is why employment growth tends to generate more equal income growth than rapid pay growth (which tends to benefit those towards the top of the distribution), and why the UK’s recent impressive performance on employment has been good for lower-income households. All of which should be cause for celebration.

However, there is a snag. While today’s statistics should serve as a reminder that a tight labour market works in favour of those on lower incomes, a tight labour market used to generate a lot more pay growth. The chart below shows periods in which unemployment was below 5 per cent. Before the crisis such periods were associated with pay growth around 4 per cent. Today it is closer to 2.5 per cent, which may be the new normal.

All of which means that much of the conversation about these statistics will soon turn to how they’ll be interpreted in Threadneedle Street. If the Bank believes that – due to lacklustre productivity growth – nominal pay growth is actually as good at it gets then a rate rise will be on the cards. For the sake of people’s living standards let’s hope that this isn’t as good as it gets.