Labour market· Productivity & industrial strategy Britain passes a major milestone on pay and breaks new ground on jobs – but there’s a productivity sting 17 April 2018 by Stephen Clarke Stephen Clarke This morning UK labour market passed a few living standards milestones on pay and jobs with two good pieces of news, one expected and one a surprise. We also got a hint of more good news to come. But we also got one bit of bad news. Let’s start with the good. Today pay growth turned positive for the first time in 12 months. Following the devaluation of the pound in the wake of the referendum vote UK pay packets have been squeezed. Rising inflation – which rose to 3 per cent in late 2017 – coupled with sluggish pay growth meant that average weekly pay had been falling since February 2017. Today we learnt that the squeeze came to an end with positive pay growth of 0.2 per cent in the year to February 2018. Real pay growth is expected to strengthen over the course of the year too. While it was expected that pay growth would turn positive this month (as our pay projection last month predicted) we also had an unexpected rise in employment and a fall in unemployment in today’s stats. Employment rose to a new high of 75.4 per cent and unemployment fell to 4.2 per cent as 55,000 more people moved into work. We should see more good news on jobs in the months ahead too. The headline unemployment and employment figures are three-month averages based on single-month rates and today the single-month estimates moved sharply. February’s employment figure is 76 per cent and unemployment is 4 per cent. Next month, once the relatively weak December figures fall out of the three-month average, we could break new records on employment highs and unemployment lows. This news is very welcome, but we shouldn’t get too carried away, at least where pay growth is concerned. Whether or not the pay squeeze has ended depends on where you look. Pay growth is much stronger in the private than the public sector – with growth of 0.3 per cent compared to a fall of -0.2 per cent. And while pay in parts of the private sector – finance, construction and real estate – is growing healthy, the squeeze is still on for those working in education and health. And now the bad news. Continuing to rain on everyone’s parade is the fact that pay growth remains unusually low given the apparent tightness of the labour market. Before the crisis unemployment below 5 per cent was associated with pay growth of 4 to 5 per cent. Today we have unemployment near 4 per cent, but pay growth refuses to rise above 3 per cent. The big risk going forward is that 3 per cent becomes the new normal. That would dash hopes of a much-needed bounceback on pay. And unless productivity picks up it’s likely to remain that way. It did seem that this productivity shift could be happening towards the end of last year. However, initial estimates for GDP growth in the first quarter of 2018 from the National Institute of Economic and Social Research, coupled with the last two months of hours worked data, show that output is again rising much more slowly (0.2 per cent) than hours worked (0.5 per cent). Britain is still much better at working harder than working more efficiently.