Unemployment is at its lowest since 1975, according to reports. Sounds like unquestionably good news, right? Today we’ll break down the financial context and repercussions from the recent announcement.
Unemployment Is Falling
The high street is taking a beating, yet the UK’s employment landscape is something of a purple patch. Unemployment has fallen to a 43-year-low according to the Office for National Statistics (OfNS). The number of people now in employment in the UK is 32.4 million. Alongside the rise in employment, there was a significant drop in UK citizens on zero-hours contracts.
Wage Growth Has Stalled
As reports arrive regarding the rise in employment, stats around wage growth show that the picture isn’t all good news; according to the OfNS, wage growth has kept in line with inflation. Subsequently, living standards have “ground to a halt.”
The Connection with Bank of England Interest Rates
The strength of the economy, reported earlier this year, resulted in the Bank of England raising interest rates from 0.5% to 0.75%. The employment rates are factored into such rate changes by the Bank of England.
The rise in interest rates is part of the Bank of England’s wider aim of achieving a 2% inflation rate. One inflation rate (there are several) measures the speed at which the prices of services and goods increase over time (£2 in 2016 is worth £1.75 in 2017 when adjusted for inflation). Generally speaking, by increasing interest rates, the Bank of England is encouraging people to spend less, and by lowering interest rates, the Bank of England is encouraging people to spend more.
Inflation often rises in line with the demand for goods and services. After Brexit, for example, the UK might have a greater demand for European products because they are much harder to obtain due to trade restrictions, while supply could dry up due to new trade regulations; this would likely result in inflation.
The interest rate fluctuations then filter through to commercial banks; the Bank of England pays the higher interest rate on the reserves of cash held by commercial banks. The commercial banks then increase interest rates, which results in more interest on savings and a higher rate on loans. In its simplest form, one could argue the rise is good for savers and bad for borrowers; although commercial banks aren’t always quick to pass on the interest they receive to savers.
Interest Rates, Employment and Wages – What’s the Connection?
According to one report, the rise in interest rates was made on the premise that wages would increase in line with employment. One finance professional told the Telegraph that wage increases were one of the principal justifications for the increase. Back in May, experts speculated that evidence of small wage growth in the first half of 2018 would give the Bank of England the confidence it needed to go ahead with an interest rise (which they did on 2nd August 2018).
The reality for average workers is that the interest rise means higher mortgage, credit and loan repayments. For those without the commitments of a mortgage, the rise will likely mean simply more time until they can make it onto the property ladder. It may mean greater interest on savings, but, unlike the increase in mortgage payments, there’s no guarantee the commercial banks will push the beneficial interest rates through to their customers.
The BBC said, “surveys revealed that over 40% of low to middle income families feel they would be unable to save £10 a month and over 35% would be unable to afford a holiday for one week with their children.”
The wage stagnation means an average worker’s salary is roughly in line with inflation. The bottom line appears to be, yes, less are unemployed, but life is becoming more expensive. The economy is in a relative position of strength, but this strength is not trickling down into the average worker’s pocket. According to Suren Thiru, head of economics at the British Chambers of Commerce, “weak household savings and high debt levels” are likely to make many feel financially stretched.