Bridgewater: UK Labor Markets Have Improved Dramatically

UK labor markets have improved dramatically in recent months: that’s the view of Bridgewater’s Jason Rotenberg and Spencer Gaffney as published in one of the fund manager's Daily Observations notes.

Recent labor market dynamics have improved significantly compared to earlier in the cycle when many jobs being created were low-paying, and wage inflation was weak. Wage growth has now improved, off the lows but still modest and more high-quality, full-time jobs are being added.

Surpassing expectations

UK labor markets: Growth improving

The UK is an attractive economy to study. The country’s economic growth has exceeded expectations during the past few years and at one point the country was forecast to grow faster than any other developed nation. Economic activity is back to normal levels, and labor markets are showing signs of strength. However, core inflation remains depressed, around 1.5% below the 25-year average, reflecting both disinflationary external factors and a stronger currency. Another driving factor of weak overall inflation has been the weakness in wage growth. Over the past twelve months there has been a pronounced uptick in wage inflation -- in fact this has been one of the strongest periods of wage growth for several decades, although the growth has come from a low base.

Employment growth

Job growth has been another driving factor in UK economic growth. Employment growth has been very strong since the financial crisis, but, as noted above, many of the jobs created have been low-wage, part-time work and self-employment. In other words, the low cost of labor was driving stronger employment, rather than a tightening labor market driving higher wages.

UK labor markets: Inflation and growth expectations

However, over the past year this trend has reversed. There has been a substantial increase in high-wage job creation. The increase has been so great that Bridgewater’s analysts’ note this has been the most significant expansion of high-wage positions in a decade. The number of self-employed is also starting to drop. At the end of 2014 the number of people involved in self-employment dropped by nearly 5%, the most dramatic contraction for more than a decade.

With net migration boosting the UK labor market by around 0.7% per year since the financial crisis, supply to the labor market has been higher than it would have been if the migration had not materialized. This is another explanation for slack wage growth up until last year.

But while the UK labor market looks to be improving from a broad perspective, there are still some areas of slack that are not seeing increased demand.

UK labor: Areas of slack

For example, the UK has a high proportion of part-time workers, who can’t find a full-time job. While there has been a slight fall in the number of these workers during the past few years, levels remain elevated, and this group has fallen less than the official unemployment rate. The number of part-time workers remains elevated compared to pre-crisis levels. Self-employment is another sector of the employment market that’s exhibiting similar traits. The number of self-employed has risen dramatically since the financial crisis, and this number has not fallen dramatically as the rest of the labor market tightens.

But, all in all, Bridgewater’s analysis shows that the UK labor market is improving.

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