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Unemployment now as low as 1975 – but there’s no upward pressure on earnings inflation

Monday 20th March 2017

Written by Martin Upton

The latest unemployment and earnings data published by the Office for National Statistics (ONS) portray an interesting picture of the labour market in the UK. At 4.7% of the workforce unemployment is now as low as it was in summer 1975 – the year of the first referendum on membership of the European Economic Community (the precursor to the European Union). 
 
But there similarities with labour market conditions end: the latest data on earnings inflation shows that average earnings rose at an annual rate of 2.3% in the three months to the end of January this year. By contract earnings inflation in summer 1975 peaked at close to 30% (with price inflation peaking at 26%).
 
The hyper-inflation rates seen in the UK in the 1970s were driven by specific social and economic circumstances at the time – principally the surge in oil prices and the power of the trades unions together with contractual arrangements which linked earnings growth to the rise in the cost of living. Nevertheless the lack of any signs of upward pressure on wages today, despite the apparent shortage of available labour, looks odd.
 
There are, though, several explanations.
 
Wages in the public sector are subject to a 1% cap on their annual increase
 
Much of the growth in employment in recent years has been in non-unionised sectors of the economy where wage bargaining is less well organised than in unionised sectors
 
The weakness of the economy after the 2007/08 financial crisis is still firmly in our memory and is probably containing the willingness of employees to push for higher wages
 
The increasingly flexible way that the labour market now works (for example with the growth of zero-hours contracts) has created an environment where employers can exert greater control on their wages bills
 
So for the time being at least the reduction in unemployment seems unlikely to trigger a boom in earnings. And with price inflation set to rise further from its current rate of 1.8% (as measured by the Consumer Prices Index) the prospect is that the coming months will see virtually no growth in the real (i.e. post-inflation) level of average earnings.
 
Paul Johnson, the Director of the Institute for Fiscal Studies (IFS) has even forecast that (real) earnings will be no higher in 2022 than they were in 2007. Fifteen years without a rise in living standards? Perhaps life really was better in the hyper-inflationary 1970s!
 
*Martin Upton is Director of the True Potential Centre for the Public Understanding of Finance (True Potential PUFin)
 





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