Unemployment rate looks set to remain at all-time low but Brexit uncertainty could hit wages

Britain's unemployment rate looks set to remain close to its 11-year low in 2017, but wages are unlikely to grow significantly, one of the Bank of England's (BoE) policymakers said on Friday (13 January).

Speaking to the Resolution Foundation think tank, Michael Saunders said he expected the unemployment rate would remain below 5% this year, defying the BoE's forecast for a sharp increase.

The UK's unemployment rate hit an 11-year low of 4.8% in the third quarter of last year but, in its November Inflation Report, Britain's central bank indicated the rate would rise to 5.4% by the end of 2017.

The forecast was based on the assumption Britain's economic growth would slow down from 2% last year to approximately 1.4% over the next 12 months.

However, Saunders, an independent external member of the rate-setting Monetary Policy Committee, painted a brighter picture for the UK's labour market.

"Economic growth has recently been stronger than expected," he said. "Rather than the rise in unemployment forecast in the November Inflation Report, it seems quite possible to me that the jobless rate will stay below 5% this year."

The BoE economist also highlighted the major shift that has characterised the labour market over the last five years, as the numbers of self-employed workers has risen by 14%, while the number of agency workers has increased by approximately 30%.

Meanwhile, the number of people working full-time remains below the levels seen before the financial crisis and the zero-hour contracts have become increasingly common.

"Some people may prefer flexible work structures or seek to reinvent their career through self-employment," he said.

"But, given that on average these less secure forms of work are also less well-paid, the expansion of contingent work probably also reflects the erosion of secure and well-paid jobs from technological gains and greater emphasis on cost control."

He added lower-than-expected unemployment was unlikely to translate into additional inflationary pressure on the UK economy, as wages were unlikely to record strong growth.

"These changes [in the labour market] probably imply greater downward pressure on pay growth for any particular jobless rate than previously," he said. "It is also possible that Brexit-related uncertainties will reinforce other factors dampening pay."

Saunders also added the inflation was still likely to exceed the BoE's 2% target, although that was largely attributable to the pound's steep decline in the wake of the Brexit referendum. However, he conceded inflation could still surprise economists.

"If pay and other labour market guides give clear warning signs in coming months [...] this would have obvious implications for monetary policy, unless downside risks to economic growth rise significantly," he said.