The most recent unemployment rate in the UK came in at 4.6% – along with the highest ever employment rate achieved, at 74.6%.

Economic theory – namely the Phillips curve model – tells us that as the level of unemployment falls, the economy can expect a corresponding increase in the rate of inflation. But recent inflation increases in the UK have been the result of commodity price increases and a weaker sterling – not inflation generated by a booming labour market. Average earnings and productivity data have been relatively static; this has been attributed to the dampening effect of the gig economy.

‘Gig economy’ is a term used to describe a labour market characterised by flexible, less permanent jobs with more short-term contracts and freelance work. The chart below shows the extent to which the UK has transitioned to this, with a significant increase in self-employed workers and zero-hours contracts as a percentage of the total employed.

Source: ONS as at 31 January 2017

This affects average earnings. Recent data from Barclay’s researchers indicated that self-employed workers earn 20% less than full-time employed workers, while those on zero-hour contracts have little bargaining power and struggle to force wages higher. On top of this, the current tax regime in the UK favours two lower wage earners in one household over one higher wage earner. The same net income can be achieved by two people doing less or doing lower paid work and leaving spare time to work in the cash “black” economy too.

These dynamics directly influence central bank decision-making and so are important to consider when forming a long-term view on rates markets. The structure of employment has changed; this is no rigid 1950’s society and as such we expect the Bank of England to demand some hard data before taking action this time round. Investors calling for a rate hike still have a long wait.

Brexit is a clear risk to any firm view on the outlook for the UK despite the reasonably benign outcome since June last year. With immigration still a key political issue, labour coming from Europe to work in the UK remains a wild card for employment numbers as Brexit negotiations kick off. Nonetheless, Brexit implications are far more likely to see a central bank willing to support the economy, rather than tighten policy.

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