All the Wage: Low levels of unemployment boosts wage growth

September 27, 2019

3 min read

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What's going on here?

Unemployment levels in the UK fell in the three months between May and July to a 45-year low. Wage growth has been accelerating, with monthly wage growth above 3% since September 2018. Such growth has not been experienced since the financial crisis.

What does this mean?

Increased employment creates greater demand for labour. When there are less people available for hire, companies have to drive up wages to attract talent and retain manpower.

On the issue of employment, context is key. The rising employment level comes at a time of uncertainty. Firms are taking measures to “Brexit-proof” themselves. The pharmaceutical, manufacturing, food and beverage industries are all stockpiling goods in a bid to prepare themselves for Brexit.

Employment levels are enhanced when companies stockpile talent. Economists indicate that companies hire workers rather than making investments in technology and equipment due to the greater ease in laying off an employee. There is also strong demand for seasonal workers in the hospitality industry, many of whom traditionally come from the EU.

What's the big picture effect?

On one hand, a rise in national living wage is good for an economy. It allows for consumer spending confidence and greater job mobility due to higher labour demands.

On the other hand, it can spell problems when companies focus on hiring rather than investing – the people they attract would be seen as short-term assets. The rush to recruit labour and outbid competitors in hiring might mean exaggerated benefits drafted in contracts, and a lack of long-term commitment to keep employees. In the long run, employment and disputes departments might be required to assist in any “unfair dismissal” cases.

With unemployment at an all-time low, 4% as measured in the latest data, could this rate realistically continue? The data points towards yes, as the aging population and a rise in female participation seems to suggest the growth will be sustained. Employment growth has also been driven by stable full-time employment since 2016.

However, wage growth has been argued to be temporal. It is also largely dependent on Brexit. Depending on the type of Brexit we get, the effect on employment will vary. 

Any “soft Brexit” deal would result in a continuance of a tight labour market, especially with reduced labour migration from the EU. This places greater bargaining power in the hands of employees, and this power shift means that growth should continue.  

In the event of a “hard Brexit”, wage cuts and retrenchments could be rife. Law firms would need to advise on employment termination and pre-empt potential lawsuits. As companies might revamp pay structures when Brexit occurs, the expertise of employment and risk advisory legal departments would be required.

A no-deal Brexit could only place the employment and wage growth under threat as uncertainty will dominate the industry. 

Aside from the effects of Brexit, productivity has remained largely stagnant due to general economic uncertainty. This does not bode well with wage growth, especially with the looming threat of inflation. Businesses should look into restructuring pay systems and making investments to boost productivity. Law firms would assist in such regulatory and restructuring  work.

However, employment and wage growth looks promising overall, despite the areas for concern highlighted above, and so it is essential that calculated steps are taken to ensure sustained growth and mitigate these potential problems. Therefore, the drop in unemployment and consequent wage rise should be regarded with optimism, albeit a cautious optimism.

Report written by Sherard Siahaan

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