The UK jobs market: Getting tighter

http://www.bbc.co.uk/news/business-34393334

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Supermarket chain Morrisons has announced that from March next year it will become a living wage employer.

The firm becomes the first of the "big four" supermarkets to become to pay the living wage to all staff.

The move is to the pay figure calculated by the Living Wage Commission, based on their estimates of the cost of living, rather than the new, and lower, national living wage, which is essentially a higher minimum wage announced by the chancellor at the budget.

Morrisons' decision - which will benefit 90,000 staff and cost the company around £40m - follows other big wage rises in recent months at Lidl (which is also adopting the living wage), Starbucks and Sainsburys.

This is obviously a healthy sign for UK wage growth, but what is perhaps more significant is that these big wages are coming in what is often seen as a relatively low-skilled part of the service sector.

A cynic might see these moves as an attempt to gain positive PR, while an idealist might claim that corporate Britain is seeking to better reward its employees.

An economist, though, sees this as evidence that the UK jobs market is becoming tighter.

Assessing how tight the labour market is is notoriously tricky and over the last few years it has been trickier than ever in the UK.

Despite strong employment growth, wage growth remained historically weak - the usual link between falling unemployment and rising wages seemed to have been broken.

But it may now be that it is becoming re-established.

Those looking for evidence of a tight jobs market over the past year have been able to point to (very) high employment, lower unemployment and a falling ratio of unemployed workers to job vacancies.

Those arguing that there is more slack than those headline numbers suggest have marshalled two main arguments: that under-employed (workers working part-time who want to work full-time or more generally those wanting to work more hours) has risen sharply since 2008 and that at least some of the large rise in self-employment of recent years is really a form of disguised under- or un-employment.

Big wage rises in the service sector though may tip the balance of evidence towards a tighter jobs market.

While parts of the construction and manufacturing sectors have been suffering from skills shortages leading to recruitment difficulties and higher pay for while now, there is growing evidence that this is becoming a more widespread issue.

And if you are having trouble recruiting, then one answer is to raise wages.

The most recent labour market data from the Office for National Statistics hinted that UK productivity may finally be on the rise - while the total amount of hours worked in the economy fell in the most recent quarter, total output was estimated to have risen.

Which would mean that output per-hour-worked (the crucial productivity measure) is finally heading in the right direction.

At this point it would be possible to sound a note of caution: to argue that, while bigger pay rises for staff are obviously very welcome to those receiving them, if they outstrip productivity (and at the moment despite better signs on productivity growth it is almost certainly lagging behind wage rises) then the eventual costs will be higher unemployment.

What next?

There are times when faster-wage-than-productivity growth is something to welcome from a macroeconomic point of view.

And now is one of those times.

In fact the Bank of England, in their most recent Inflation Report, were explicit about this.

Inflation is currently stuck at around zero per cent, getting it back to their target of 2.0% requires faster earnings growth.

As the Inflation Report argued in August, wage growth that is faster-than-productivity-growth should push unit labour costs (the average cost of producing a unit of economic output paid to workers) upwards.

Faced with rising unit labour costs, firms will try to protect their profit margins by raising prices and that rise in prices should (hopefully) return inflation to 2% in the coming years.

A generation ago there were plenty of UK macroeconomists and central bankers who would have been fretting about big above-inflation pay rises that outstripped productivity growth.

They would have feared that such rises would simply push prices higher and workers would respond by demanding higher wages.

But times change, right now with inflation that is too low rather than too high, then above-inflation pay rises aren't part of the problem, they are part of the solution.