The UK labour market showed unexpected resilience this month, with the unemployment rate dropping to 4.7% in the three months to August, down from 4.9%. This decline surpassed market expectations of no change and fell below the estimated natural rate of around 5.0%. The improvement was driven by stronger employment rather than a rise in inactivity, as the employment rate for 16- to 64-year-olds increased by 0.2 percentage points to 75.3%. However, experts caution against reading too much into one month's data due to its volatility.
Signals on labour demand remain mixed. Vacancies fell by 21,000 to 691,000 in the three months to September, marking the lowest level outside the pandemic since 2014. Despite this, HMRC payroll data suggest a low-hire, low-fire labour market, with firms hesitant to let staff go. Early estimates even indicate a slight uptick in hiring, with payrolls rising by 13,000 in September. Overall, the labour market appears to be stabilising, though GDP growth of just 0.1% in August suggests a stronger recovery is unlikely for now.
Regular pay growth edged up to 3.7% in the three months to August, while total pay growth slowed to 3.7% due to a decline in bonus payments. Public-sector regular pay growth remained high at 6.3%, compared with 3.0% in the private sector. NIESR's wage tracker predicts public-sector regular pay growth will ease to 4.6% in the fourth quarter, though several settlements, including a 3.5% award for teachers and civil service awards, have yet to be reflected. This poses a risk for the Chancellor, who may face higher-than-planned public-sector pay bills ahead of next week's Budget.
For the Bank of England, today's figures offer some reassurance. Unemployment has fallen without significantly increasing pay pressures, and private-sector regular pay growth of 3.0% aligns with the inflation target. However, real regular pay growth of just 0.6% leaves households with little room to absorb higher energy bills over the winter. With vacancies at their lowest level in over a decade and pay settlements cooling, workers have limited scope to secure higher pay. This should provide the Bank with more confidence to hold its nerve in November, despite the decision to hold looking finely balanced.