Despite signs that the labour market is tightening, the issue remains low down on the Bank of England's priority list.
Unemployment and earnings figures yesterday provided fresh signs that there may be pressures building. While the City had expected the labour market to turn the corner, the bald statistics told the opposite story.
A total of 328,00 new people have come into the workplace in the past 12 months, propelling the employment total to a record 27.35 million or 74 per cent of the potential workforce. Meanwhile, the number out of work has fallen to the levels achieved in the early Thatcher era of 1980, while average earnings is showing signs of picking up.
In the United States a similar rosy labour market picture has led to dire warnings of tighter monetary policy from the chairman of the Federal Reserve, Alan Greenspan.
But at the Bank of England's Monetary Policy Committee, the labour market has fallen from the top to the bottom of the agenda. As the minutes of their latest interest rate meeting, published yesterday, showed, the debate among the nine MPC members is between holding rates or cutting them. A rise is not on the agenda.
Only 12 months ago the Bank raised rates after a marked rise in earnings confirmed fears that the labour market was too tight.
One year on and the debate is entirely focused on the exchange rate. With a strong pound eating into the export manufacturing industry, the issue is whether rate cuts are needed to counter the impact.
But some economists are worried pressure is building in the labour market that could quickly translate into rising inflation.
John O'Sullivan of Greenwich NatWest, said: "If anything the labour market is tighter now than it was a year ago, when worries that unemployment was below the natural rate were greatest. If growth accelerates in the second half of the year, we expect concerns about workers depletion to be voiced more freely."
The huge growth in employment and the commensurate fall in economic activity has brought a whole new section of people into the labour market.
As the economically inactive are those people who do not want a job or who are not actively looking for one, the decrease suggests the labour market is running out of spare capacity.
Economic activity among women aged between 50 and 59 has risen by 5.3 per cent - the largest rise of any age group of either gender - indicating that many of those joining the workforce were hitherto inactive.
The issue is how long the economy can continue to take on previously inactive people without creating inflationary pressures. "The last time we saw a similar net flow of formerly inactive workers into employment was in the late 1980s, a period of intensifying wage and price inflation," said Mr O'Sullivan.
In the US ,one factor that has staved off rate rises is the massive improvement in productivity. Figures last week showed workers' hourly output of goods and services was rising at an annual rate of 4 per cent. In the UK, productivity rose by 0.7 per cent in the last three months of 1998 compared with a year ago, lower than the rates for the previous two quarters. Unit wage costs, meanwhile, rose to 4.2 per cent from 3.3 per cent.
The fact that a larger number of workers are achieving only marginal improvements in productivity within a low-growth economy should ring alarm bells. "With earnings accelerating, claimant count unemployment falling again and full-time jobs being created even at the low point of the cycle, can it be long before the exchange rate gives way to the labour market at the top of the policy agenda?" asked Mr O'Sullivan.
Mervyn King, the Deputy Governor of the Bank of England, accepted that the one key element of the US paradigm of low inflation and high growth that it had not copied was productivity. "Productivity in the UK has been lower than we expected and we have been trying to work out why," he said
"It possibly reflects successful labour market measures by bringing in people who are unemployed and whose productivity is lower than those who are employed. These are things we intend to investigate further."
Economists were able to take comfort from a mixed picture on wage inflation. At the headline level, earnings growth rose to 4.8 per cent in March - above last month's figure, the City forecast and the MPC's 4.5 per cent benchmark for a rate consistent with the inflation target.
But pay excluding bonuses fell back to 3.3 per cent from 3.8 per cent. In addition, March is the month when bonuses to financial services workers show up. The bonus component rose from 1.3 per cent to 1.7 per cent.
This is consistent with data showing that pay settlements are falling back. Figures yesterday from the Engineering Employers Federation showed settlements in April were stable at 2.6 per cent.
Richard Iley, of ABN Amro, said: "With the economy only recording very modest GDP growth over the last six months, it seems counter-intuitive that bonus payments are accelerating. With short-term growth [still] sluggish and profitability under pressure, we would expect the contribution of bonuses to pay growth to fall back."
The Government is happy to take some credit for what it sees as the success of its labour market reforms. Andrew Smith, Employment minister, said: "The New Deals are helping to ensure that more people are joining the labour market and getting access to jobs." More people were joining the labour market for whom family responsibilities, or illness or disability, might previously have been an "insurmountable barrier" to work, he added.
"The New Deals for lone parents and disabled people, together with the tax and welfare reform measures to make work pay, will build on this trend of greater participation in the active labour force."Reuse content