MNI POLICY: UK Labour Market Tight On All BOE's Measures

Opinions vary within the Bank of England’s Monetary Policy Committee over the relative importance of different labour market measures, but analysis for the BOE’s upcoming May forecast round looks set to conclude that all the relevant metrics remain tight even if easing slightly from their peaks

While some MPC members are most interested in how joblessness compares to an estimated neutral rate of unemployment compatible with inflation at target (U*), others like BOE Chief Economist Huw Pill place more weight on measures of job churn and skills mismatches.

This may sometimes be a recipe for disagreement, but not now, with all measures pointing to a still-exceptionally-tight labour market though with early signs of easing, Stephen Millard, Director of Research at the National Institute of Economic and Social Research told MNI.

The MPC will have to sign-off on the labour market analysis in the May Monetary Policy Report and Millard said it is likely to point to a slight retreat from earlier tightness.

“They might refer to the latest vacancy data falling, the latest unemployment data with unemployment rising, and then they will probably say something like 'but the labour market is still very tight and/or the unemployment rate is still significantly lower than U* and so we expect continued high wage growth'," he said.

WAGE GROWTH STILL TOO HIGH

Such a view would be in line with comments made by BOE Deputy Governor Ben Broadbent in a Q and A at NIESR last Tuesday, when he said that some upward pressure on pay was moderating, but not to the extent required. The BOE is widely expected to hike by another 25 basis points to 4.75% later this month.

The vacancies-to-unemployment ratio, which held for a long while around 0.4, fell to 0.2 during the financial crisis before rising above 1 post Covid, Millard said.

"Since then it has come down, but the ratio is still 0.9, which is still very high, so by all accounts the labour market is still very, very tight," he said. (See MNI INTERVIEW:UK With Higher NAIRU More Prone To Wage Pressure)

Job churn, which Pill said at an MNI event on April 13 that he favoured because of the current uncertainty over labour market participation, is another measure cited by the BOE, with academic work identifying it as a driver of wage growth as workers move into higher-paid jobs.

"If the labour market is tight there is going to be a lot of churn," Millard said, adding that once again the signs are that it has peaked and come off somewhat.

"The one most people use is the vacancies-to-unemployment ratio ...The latest data on that is it has come down a little bit but it is still very, very high. For a time that ratio actually topped one, which just never happens," Millard said. At the same time "it is fairly clear that the unemployment rate is well below (U*)" but "the only way you can really measure it is ex-post; when you see wage growth going down you know that you’re there."