All eyes on the labour force after Brexit vote: economists react

Britain’s labour market held steady with unemployment and earnings remaining largely unchanged in the three months to June – when Britons voted to leave the EU.

Here’s a roundup of what UK-watching economists make of it all.

Mark Carney, governor of the Bank of England, has warned around 250,000 jobs could be lost as a result of the adjustment forced on the economy after the Brexit vote in late June. As it stands, employment rose 172,000 and unemployment dropped 52,000 in the three months to the end of June.

All in all, it should be a while yet before economists can get a good idea of just how the referendum will effect the labour market, notes Sam Hill at RBC Capital Markets:

The employment component of the PMI surveys had dropped towards the neutral 50 level in the months prior to the referendum, suggesting that employment gains would have slowed anyway, irrespective of the outcome of the vote.

It seems likely that there will be a fairly marked slowdown in employment gains from here, and as such 4.9% is set to be the trough in the unemployment rate for now.

In turn, once again the prospects for pay growth breaking out of the 2-2.5% 3m/y range to the upside are diminishing, even though there is some dispersion between earnings in different sectors.

For the labour market data in particular it will be a long wait before a clear picture emerges of the referendum effect.

At 4.9 per cent, the UK’s lowest unemployment rate in over 10 years is not here to stay, says Nina Skero at the Centre for Economics and Business Research.

But even though unemployment is set to rise, she expects a firm lid on joblessness as wage growth will also remain subdued, echoing developments in the labour market first seen after the financial crisis:

Companies facing hardship may choose to limit costs by holding wages steady rather than cutting staff.

This is in line with the approach that some UK-based companies took when dealing with the aftermath of the global financial crisis. There is already some evidence of this happening as the number of people claiming jobseeker’s allowance fell in July.

James Sproule, Chief Economist at the Institute of Directors says a survey of members at the IoD found that 80 per cent of employers said they were unlikely to give pay rises in the next three months, with 80 per cent also saying they were unlikely to reduce their headcount.

“We do not think that there will be an immediate large spike in unemployment,” said Mr Sproule.

Scott Bowman at Capital Economics thinks subdued wage growth should also provide some degree of comfort to the Bank of England, as it is expected to cut interest rates again later this year:

The vote to leave the EU should cause some firms to put hiring decisions on hold or cut back headcounts altogether, resulting in the unemployment rate drifting up over the coming quarters.

This should contain any further rises in earnings growth and keep domestic cost pressures in check. Accordingly, the MPC should be able to follow through with more monetary easing in order to support the economy, without worrying about stoking domestically-generated inflation too much.

The only smidgen of post-referendum data came from the claimant count number for July, which fell unexpectedly by 8600. Economists had expected it to rise by 9000.

This suggests “employers avoided a knee-jerk reaction of cutting jobs following the cote to leave – although it is should also be borne in mind that claimant count unemployment had risen for four months running through to June”, said Howard Archer at IHS.

The labour market may be in “rude health”, but the BoE was right to inject a triple-dose of stimulus at its August meeting, says Anna Leach at the Confederation for Business Industry. With monetary policy pulling the levers, it’s time for the government to step in:

Businesses now need the Government to make ambitious decisions in the Autumn Statement that will secure the UK’s economic future as changes to trade, regulation and access to skills loom on the horizon.

Those calls were echoed by Suren Thiru at the British Chamber of Commerce:

More needs to be done to boost business confidence, so that firms can continue to grow and recruit. This includes careful consideration on how initiatives such as the apprenticeship levy and national living wage are implemented.