New methodology suggests UK rate of unemployment lower than previously thought
Downward revisions to the rate of unemployment could cause the BoE to delay cutting interest rates
The Office for National Statistics (ONS) has today published updated UK employment data using the revised Labour Force Survey (LFS). The LFS is the main tool the ONS uses for calculating the official UK unemployment rate. However, falling rates of firms’ participation in the LFS, plus outdated UK population estimates, had raised concerns regarding its reliability as an accurate measure of the strength of the UK labour market. The revised LFS now incorporates updated population estimates; the problem with the low participation rate is still outstanding.
Recognising these issues the ONS had been publishing employment data using using changes in Pay As You Go (PAYE) returns - essentially changes in the number of pay-rolled staff paying tax in the UK - and changes in the claimant count rate, while working on updates to the LFS. With these partial revisions to the LFS now in place the ONS is now reporting that the level of employment in the UK actually rose by 108k on a 3-mth-on-3-mth basis in November, an increase on the 73k figure calculated using the PAYE data, and that the rate of unemployment was actually only 3.9%, down 0.3% from the provisional 4.2% reading calculated using changes in the claimant count rate. The ONS has repeated that it still has little confidence in the quality of these figures, as the problem with the decline in the LFS response rate has yet to be addressed. But the revised methodology does represent an improvement nonetheless, and suggests that the official estimate for the rate of unemployment, due to be published next Tuesday (14th February), will now be considerably lower than both the 4.3% estimate contained in last week’s Monetary Policy Report from the Bank of England (BoE) and - significantly - even further away from its estimate of the equilibrium rate of unemployment of 4.5%.
Other measures of labour market strength are still pointing to a weakening in labour demand overall, such as the number of redundancy notifications received by the UK Insolvency Service, which were nearly 20% higher over most of January than the same time last year. But for the BoE, today’s numbers suggest it could display more caution regarding the timing of the first cut in interest rates, given that it has admitted to watching the labour market closely when judging whether inflationary pressures have cooled enough to facilitate any loosening in monetary policy.
Going forward, the ONS is continuing to work on replacing the LFS with the “Transformed LFS”, which is scheduled to become the primary source of labour market information from this September onwards. In the meantime, it has gone back to holding face-to-face interviews with firms since last October and has increased the sample size since the start of this year to increase the volume of data captured. However, it will take time for the impacts of these measures to be seen, meaning that while at this juncture our expectation remains that the BoE will ultimately deliver 75bps of cuts this year, the possibility that the first cut may not be delivered until at least June is growing.
The suggestion that the UK labour market is stronger than previously thought could cause the BoE to delay cutting interest rates