UK unemployment decline shadowed by negative real earnings

<p>Instead of lowering the unemployment threshold from its existing 7.0% and risking an attack on the credibility of its nascent forward guidance, the Bank of […]</p>

Instead of lowering the unemployment threshold from its existing 7.0% and risking an attack on the credibility of its nascent forward guidance, the Bank of England may start emphasizing real average earnings growth (weekly average earnings y/y minus CPI y/y), as a means of convincing bond markets to keep a lid on gilt yields as well as rate expectations. Real earnings have remained below zero since 2009 (see chart below).

The 7.1% figure in UK November unemployment is the lowest since March 2009, while 0.3% the decline from October’s 7.4% is the biggest monthly drop in 17 years.

Although unemployment is fast approaching the BoE’s 7.0% threshold deemed a reference for considering raising interest rates, the central bank’s knockouts remain firmly within the boundaries of maintaining asset purchases.

With inflation finally reaching the 2.0% target and sterling’s effective trade index at 6-year highs, the BoE can safely make the case for ongoing asset purchases in order to further cap gilt yields and further stimulate growth and employment.

Carney can point to “real” earnings, not just unemployment

Rather than lowering the unemployment threshold from its existing 7.0% and risking an attack on the credibility of its nascent forward guidance approach, the Bank of England could add to real average earnings growth (weekly average earnings y/y minus CPI y/y) to its guidance, as a means of convincing bond markets to keep a lid on bond yields and rate expectations.

BoE on earnings growth: “There was also considerable uncertainty about the extent of slack within business. Survey evidence suggested that, on average, business were working around normal levels of capacity utilization”.

The graph of “real” wage growth in the bottom chart overlaid against 10-year gilt yields puts in perspective the rapid pace of declining unemployment rate and the recent drop in inflation. Real wage growth has only began rising towards zero since September after stagnating in negative territory for most of 2013.

Just Bernanke repetitively kept a lid on yields for most of H1 2013 by referring to slack and structural weakness in labour market, Mr. Carney could resort to the same approach. Such a policy may not be inflationary as long as sterling preserves its “structural” robustness. This is also not a bad idea as Carney’s boss approaches elections.

uk unemployment chart

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