January 16, 2008 / 10:13 AM / 12 years ago

Economy strains yet to show in job market

LONDON (Reuters) - Wage growth held firm at the end of last year and the number of people claiming jobless benefit fell to its lowest since 1975, suggesting the job market has yet to feel the chillier economic climate.

Factory workers leave after being stranded overnight by flood waters in the Brightside area of Sheffield June 26, 2007. REUTERS/Darren Staples

However, analysts said the favourable combination of steady wage growth and falling unemployment may not last for long.

The Bank of England is unlikely to sound the all-clear on wage inflation until the new year pay bargaining round is over and unemployment is widely expected to pick up as the economy slows this year.

“Unemployment continues its slow, steady decline but given that measures of joblessness tend to be a lagging indicator of the economy it doesn’t tell us very much where growth is going,” said Philip Shaw, chief economist at Investec.

The number of people claiming jobless benefit fell for a 15th consecutive month in December to 807,700 — its lowest level since mid-1975.

Meanwhile, the number of people in employment saw its biggest jump in the three months to November in over 10 years.

The economy grew by around 3 percent in 2007 but is expected to grow by less than 2 percent this year, according to a Reuters poll.

Dismal housing market data on Wednesday highlighted the risks facing the economy. The Royal Institution of Chartered Surveyors’ house price balance fell to -49.1 in December, the lowest level since the recession of the early 1990s.

NOT OUT OF THE WOODS

Some Bank of England policymakers have been surprised that strong employment growth over the past year has not translated into higher wage pressures.

Average earnings growth including bonuses held at 4.0 percent in the three months to November, below the 4.5 percent threshold the Bank deems consistent with meeting its inflation target.

Excluding bonuses, wage growth held steady at 3.6 percent.

Still, the continued tightness of the labour market and recent rises in the cost of living will keep policymakers focused on the crucial New Year pay round.

Retail price inflation eased a touch to 4 percent in December but remains at historically high levels thanks to the recent surge in oil and food prices.

“With the January pay round taking place against a backdrop of high retail price inflation and low unemployment, there is still a risk that average earnings growth could pick up in the next couple of months,” said Jennifer McKeown at Capital Economics.

Prime Minister Gordon Brown has signalled his determination to keep public sector pay increases anchored close to the government’s two percent inflation target — angering unions who claim their members’ pay is not keeping pace with the real cost of living.

Chancellor Alistair Darling announced plans last week to push through three-year pay deals for public sector workers to help keep inflation under control.

Editing by Mike Peacock

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