United Kingdom: Selected Issues

IMF Staff Country Reports, February 13, 2018

Source details

Main factors behind the slowdown: weak productivity growth, labor market slack, and low inflation.
Labor market disconnect: the unemployment rate has fallen to a 40-year low, yet wage growth continues to grow at a subdued pace.
Broader measures of underemployment—accounting for involuntary part-time unemployment, inactive and self-employed people seeking regular jobs—suggest that slack in the labor market was higher than implied by the unemployment rate in recent years.
Persistent weak productivity growth and well-anchored inflation expectations help explain the disconnect between low unemployment and subdued wage growth.
Persistent tightness of the labor market should prompt some firming of wage growth in the coming year, everything else equal.
A mild increase in unit labor costs would help bring domestically generated inflation in line with the inflation target.

Headline unemployment rate: fallen to a 40-year low.
Wage dynamics: wage growth remains subdued despite low unemployment.
Underemployment components considered: involuntary part-time unemployment; inactive people seeking work; self-employed people seeking regular jobs.
Implication: effective labor market slack is greater than suggested by the headline unemployment rate, moderating wage pressure.

Expectation: some firming of wage growth in the coming year if labor market tightness persists.
Policy signal: a mild increase in unit labor costs can support bringing domestically generated inflation back toward the inflation target.

United Kingdom: Selected Issues, IMF Staff Country Reports 2018, 043 (2018).