In response to official labour market figures released today, showing UK unemployment fell by 7,000 to 1.6 million in the three months to December, Michael Martins, Economist at the Institute of Directors, said:

“The UK’s economy reached full employment in the end of 2016, paving the way for potential pay rises in 2017 as 75% of reviews take place in the first half of the year. This is welcome news as it will help to close the UK’s fiscal deficit, which is funded by borrowing from abroad, domestic taxation, and transfers from the BoE’s QE program. Borrowing from abroad can leave the UK exposed to external shocks, while loose monetary policy has artificially inflated assets, notably housing, which eats into real incomes. Sterling’s devaluation has also increased the fixed costs for many, including petrol and food, so higher wages will help offset the damage this will do to consumption – the main driver of the UK’s recovery from the financial crisis.

“While 28% of IoD members intend to increase employment this year, a helpful proxy for pay increases, this varies from sector to sector. The construction industry has seen the rate of nominal wage growth fall by 38%, a leading indicator for costly, long-term investments. Meanwhile retail stores, hotels and restaurants, sectors likely to have benefitted most from the fall in the pound, have seen the same rate increase by 30% since June 2016.

“Given that growth is expected to slow slightly this year, we urge the Government to avoid introducing further costly initiatives on top of the new National Living Wage and the Apprenticeship Levy. Ministers should also be thinking about measures at the Budget which help smaller firms, such as raising the business rate relief threshold.”

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