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Recruitment agency pay data ‘backs case for interest rise’

Thu, 19 Jun 2014
Data on wage trends from recruitment agencies is being used by a member of the Bank of England’s monetary policy committee to support the argument for interest rates to rise sooner rather than later.

Martin Weale told a CBI conference in Belfast on Wednesday that since the statistics collected by the Recruitment and Employment Confederation relate to new, rather than existing, employees they pick up early trends in the labour market.

“The change in the survey balance is probably a better guide than the level as a tool for anticipating movements in average weekly earnings over the next six months,” he said. “ When I combine both in a simple statistical model, I forecast annual wage growth to be in the range 2.5%-3% towards the end of this year.”

Weale said that falling unemployment and recovering productivity had been predicted to result in wage growth picking up to about 4% a year. However, actual wage growth over the past six quarters has been weaker than forecast. This could be because the medium-term equilibrium level of unemployment is lower than the MPC economists believe, which would bear down on wage inflation.

So there might be some slack in the labour market for employers to keep hiring before they have to start increasing wages in real terms to attract staff. For every 1% that unemployment was above its equilibrium, he said, quarterly pay growth was likely to be 0.3% lower “than it would otherwise be”.

One factor was the “average hours gap” between the actual hours people work and those they would like to work. Weale said: “If I put all of the weakness in wages over the past down to the unemployment/hours gap being larger than we currently believe, this points to extra spare capacity of more than half a per cent of GDP. This is consistent with a medium-term unemployment rate closer to 5% than our current range of 6%-6.5%.”

However, uncertainty about the state of the labour market also made it possible that there was less labour market slack than the data implies. “One factor is that people who have been recently unemployed are less productive than average. If this is the case, then, as the economy continues to grow, unemployment could fall more quickly than the MPC expects,” he said.

Should this happen, inflationary pressures would also imply that a first rise in interest rates was needed sooner rather than later, given the bank’s policy of gradual increases.
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