Britain’s unemployment rate drops to 4.1% as vacancies hit record

UK's labour market strengthens with number of workers on company payrolls rising by 184,000 in December

Commuters make their way over London Bridge towards the City of London. Britain's job market performed more strongly than the Bank of England expected late last year. Bloomberg
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Britain’s unemployment rate dipped to 4.1 per cent in the three months to the end of November as job vacancies surged to a record 1.25 million in the fourth quarter.

Signs that the UK's labour market is improving came as the jobless rate fell to the lowest level since the start of the coronavirus pandemic.

The number of people on company payrolls rose by 184,000 in December despite the emergence of the Omicron variant, the Office for National Statistics said.

Rishi Sunak, the Chancellor of the Exchequer, said the latest figures were “proof that the jobs market is thriving, with employee numbers rising to record levels, and redundancy notifications at their lowest levels since 2006 in December”.

Britain's job market performed more strongly than the Bank of England expected late last year, as unemployment fell despite the end of the government's furlough programme, which was supporting more than a million workers in September.

While a surge of Covid-19 cases linked to the Omicron variant did cause caused widespread staff absences and hammered demand in the hospitality sector at the end of the year, the ill-effects are set to be short-lived, say economists.

The more buoyant figures suggest strength in the economy that may encourage the Bank to retain its focus on inflation, which is on track to surpass 6 per cent this year, with another boost to interest rates expected at its next meeting on February 3.

Concern about possible labour shortages and pay pressures over the medium term was the major reason why the central bank raised interest rates last month for the first time since the start of the pandemic.

“Assuming that restrictions are lifted potentially as soon as next week, the labour market could become even hotter, vindicating the BoE’s hawkish stance before Christmas,” Yael Selfin, chief economist at KPMG UK.

Tuesday's data showed that average earnings in the three months to November were 4.2 per cent higher than a year earlier, while job vacancies in the three months to December hit a record 1.247 million.

In nominal terms, pay growth is well above the 2 to 3 per cent range seen before the pandemic, and another potential inflation concern for the central bank, given weak underlying productivity growth.

But fast-rising inflation is eroding the benefit of higher pay for workers, with pay excluding bonuses flat in inflation-adjusted terms in the three months to November, its weakest performance since July last year.

“The real story this month can be found in wage growth,” said Danni Hewson, AJ Bell financial analyst. “For the first time since July 2020, wages actually fell in November if you take into account blistering inflation figures.”

The question is how this shift will affect the Bank’s thinking, Ms Hewson added.

“Spiralling wage growth and a booming jobs market played into their decision-making to increase rates in December. Do they look at today’s figures and decide their plans need to speed up in order to help average workers feeling the pain? Or do they consider that wage growth, even if you exclude inflation, is slowing and new vacancies are slowing too? Will these two things add their own drag on the inflation equation?” she said.

Samuel Tombs of Pantheon Macroeconomics said few businesses appeared to be increasing wages substantially to retain their staff. But Derrick Dunne, chief executive of YOU Asset Management, said many had announced “inflation-busting” pay increases.

Paul Dales, chief UK economist at Capital Economics, said despite real wages falling and set to decline further, he expected the Bank of England to raise interest rates to 0.5 per cent on February 3 and to 1.25 per cent by December.

Updated: January 18, 2022, 10:10 AM
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