This morning on the economic calendar we have the unemployment rate in the UK, due for release at 9.30 am, with the shakeout in the labour market continuing apace, with the claimant count climbing a further 63,800 in January, whilst the more reliable LFS measure jumped 146,000 in the final three months of last year. This brought the total number of adults out of work and seeking employment to more than 1.971 million, the highest since August 1997. Meanwhile, the UK economy shed an additional 46,000 jobs during the final quarter. The difference between this
and the rise in unemployment implies that a net 100,000 individuals entered the labour force during the period in search of work but were unable to find any. The 46,000 figure also conceals significant turnover within the jobs market, with the number of full time employee jobs falling by 66,000 (men -51,000, women -15,000) whilst part-time employee working and self-employment rose by 12,000 and 17,000 respectively.

These are typical features of an economic downturn when full time employee jobs become increasingly scarce, as indeed is higher temporary
working, which increased by 22,000 during the period. It was also interesting to note that employment amongst people of working age fell by 63,000 during the period, whilst the number of people in work above the state retirement age increased by 18,000. Although less pronounced than of late, these shifting patterns within the labour market have been discernible for the last couple of years, and help explain why, even when the claimant count had fallen to a 33 year low of 2.5% of the labour force (January 2008), wage inflation remained so subdued. Consequently, now that unemployment has been rising for 12 months (and employment declining for six), it should come as no surprise that headline annual average earnings growth is currently running at just 3.2%, the lowest since February 2003. However, with falling prices pushing the tax and prices index (which measures the increase in pre-tax income required to compensate for changes in taxation and prices) sharply lower in recent
months (-0.3% year-on-year in December), real post tax average earnings are starting to pick up. Indeed, the annual rate accelerated from 0.8% in November to 3.5%, whilst in the last three months it grew at an annualised rate of 7.1%.

Granted, real household disposable incomes remain under pressure from declining employment (and the switch between full time and lower paid part time work), but we are now beginning to see an increasingly powerful offset as a result of falling prices. Consumer demand will continue to contract over the next couple of quarters, but fundamentals will look significantly better in the second half of the year. But for now, financial markets expect a further 85,000 February rise in the claimant count and average annual earnings growth of 3.0% in the three months to January.