The UK labour market — where is it heading? - GS

Goldman Sachs’ analysts provide an in-depth study of the UK’s labour market in its latest research note published last week.

Key Points:

In the near term, we expect employment growth in the United Kingdom to slow from last year’s 1.4% to 0.0% in 2017), while labour productivity growth rises (from 0.7% last year to 1.3% in 2017). Practically all of the 1.4% GDP growth we forecast for 2017 is accounted for by rising labour productivity.

In its latest Inflation Report, the BoE revised lower its estimate of equilibrium unemployment from 5.0% to 4.5%. The justification for that change was a backward-looking view, based on wage growth having been repeatedly weaker than expected. While we view that as a fair assessment of the past, we have reservations about its relevance for the future. In the medium to long term the labour market outlook will depend on policy choices. We expect those policy choices to address some of the perceived causes of the Brexit vote (such as rising wage inequality, a flat to falling labour share of income and high levels of immigration).

Some features of the UK labour market – a rising minimum wage and the prospect of falling net inward immigration (following Brexit) – may weaken labour market flexibility. We expect the UK labour market to adjust flexibly to the adverse terms of trade shock in the near term, as real wages bear the burden of that adjustment. Yet, further ahead these changes may raise the equilibrium unemployment rate slightly, in contrast to the BoE’s view in last week’s Inflation Report.