There are some quite important changes happening in the labour market. It is clear that we are seeing a considerable tightening with the employment rate at a record high and unemployment falling to 5.5%. Unemployment is continuing to fall although at a slower pace and it may be that we are now reaching the equilibrium rate. The growth in nominal wages does seem to suggest that effects of tightening are shifting from lower unemployment to higher incomes.
Nominal wages grew by 2.7% over the last year and by 3.3% in the private sector. The construction and retail sectors in particular have seen strong growth of 5% and 4.1% over year. The increase in the annual rate across the economy over recent months has been quite pronounced and whilst we are not quite at pre-crisis growth rates, this is a clear sign of improvement. Of course, productivity weakness will weigh down on the capacity for real wages to grow strongly in the medium term.
Public sector employment continues to shift towards the private sector. A recent IFS paper forecast that this process will have to continue over the course of this Parliament. Indeed, in the absence of heavier pay restraint, Conservative plans imply a further reduction of 580,000 public sector workers between 2014–15 and 2018–19. Increasing labour mobility is therefore important to reduce sustained periods of unemployment.
Recently released ONS data gives a breakdown on the total cost of employing an individual for an hour of work including wage and non-wage costs. Non-wage costs incorporate additional employee benefits like pensions, national insurance contributions, sickness pay as well as maternity and paternity pay.
In the first three months of 2015, the index increased by 2.6% with respect to 2014, with wage costs increasing by 2.3% and non-wage cost increasing by 4.5%. Non-wage costs are clearly pushing up total labour costs. By comparison, for the euro area, the aggregate index grew much slower at 2.2%, with wage costs increasing by 2.2% and non-wage costs by 2.1%.
A trend can be observed. Labour costs closely mirrored wage costs until national insurance rates rose in 2003. Since then, the cost of an employee to a firm has grown at a faster pace than the wage of an employee.
To understand the key drivers of this increase in labour costs, the index is broken down by sector. Cost changes in private and public sectors appear to be mostly similar through the last decade. Also, from Q1 2014 to Q1 2015, labour costs have increased at similar rates of 2.1% and 1.9% in the private and public sectors.
Breaking it down by industry, Mining and Quarrying experienced the highest year-on-year growth of 14.4%, followed by Electricity, Gas and Water Supply at 9.5% and Information and Communications at 7.6%. However, manufacturing sectors like Food, Textiles, Chemicals experienced negative or only small growth in labour costs. Similarly, labour costs in Construction grew slowly. Services are scattered with Information and Communications showing 7.6% growth in labour costs, while Other Services, which includes repair of computers and other personal services, showing a decrease of -6.6%.
Source: ONS, June 2015
Interestingly, in Mining and Quarrying shows a staggering wage cost increase of 16.4%. However, Electricity, Gas and Water Supply and Information and Communications have seen astronomically high non-wage costs increases of 22.7% and 11.2%, respectively.