Hamish McRae: Jobs are being created faster than at any time since records began – but wages, it seems, remain stubbornly low. What's going on?

Economic View: In the last boom we had false signals from inflation. Now we're getting false signals on pay

How do we tame the boom? For many people it is still hard to accept that there is a boom taking place. That is understandable, given the relatively slow recovery, given regional differences, and given the fact that there is still quite a lot of slack in the economy. It is reasonable, too, to mop up that slack as swiftly as possible. But we are racing along at the moment, racing as fast as I can ever recall, and all previous bursts of high-speed growth have ended in tears.

The labour market data is remarkable. The economy is creating jobs at a rate of 115,000 a month, the fastest since records began in 1971. The US, an economy five times the size of ours, is creating jobs at a rate of around 214,000 jobs a month – and that is the highest since 1999 and is considered to be a jobs boom. Now, it is true that we can suck in labour from the rest of Europe and we are doing that. It is true, too, that some of the people who have taken on self-employment or are working part-time may be willing to accept jobs or work more hours. It is true that as yet there is no wage inflation showing through in the pay rates, which remain negative in real terms. But however you slice it, this is a boom.

You can catch some feeling for this in the two graphs. First, there is the falling unemployment rate, shown both in the three-month basis and the more lumpy one-month basis. The former is the 6.6 per cent figure generally cited, but the latter is now down to 6.3 per cent. Remember, the threshold the Bank of England cited as the point at which it would consider increasing rates was 7 per cent. The way things are going we will be below 6 per cent by the autumn.

The other graph shows what has been happening to working hours, plotted alongside purchasing managers' surveys of employment intentions. As you can see, the two fit together, suggesting that working hours will continue to climb. Gerard Lane, an economist at Shore Capital, notes that with vacancies rising, wages – on past experience – should have started to rise too. This obviously has not happened yet, which leads to the real conundrum: why are wages not climbing?

We simply don't know. It is possible that the long period of recession and slack growth has changed people's attitudes to pay: better to have a job; now's not the time to push things; other people are in a worse boat; and so on. On the other hand, it is equally possible that pay is indeed rising but that a lot of it is not being declared: cash-in-hand bonuses, and payments to owners of small businesses that will not appear in the stats for another year or more. My guess is that it's a bit of both, but that rising pay rates could start to come through quite fast.

So how fast is the economy growing? Again, we don't really know. Officially it is around 3 per cent a year, though the latest quarterly stats put it rather above that. But total hours worked are up 3.3 per cent on a year ago. If that figure is right, then unless productivity has actually fallen, the economy must be growing at above 3 per cent. Assume only a modest increase in productivity and growth would be 4 per cent or more.

Intuitively, that sounds about right. I think, when the figures become clear in a few years' time, that growth in 2014 will turn out to be between 4 and 5 per cent.

If you accept even the possibility that this might be right, then it has profound implications for policy. The idea that interest rates should remain at 0.5 per cent will appear bizarre, just as the failure of the monetary and regulatory authorities to curb the 2003-2007 boom now seem bizarre.

At that time, we had false signals from current inflation, which seemed under control, and from OK‑ish fiscal deficit numbers, which seemed just about acceptable. So the authorities were lulled into complacency. They ignored the house price boom. Now we are getting false signals again, in particular from the pay statistics, and are being complacent about the need to tighten monetary policy. They are ignoring the job creation stats.

Now let's aim off a bit. I would not argue that there has to be an immediate rise in interest rates. It would probably be safer, on the balance of risks, to start increasing rates this summer, if only to make people aware that the present monetary circumstances are exceptional and that people need to plan for normality. But it would not be a disaster to wait until the autumn. And given the low current inflation numbers (notwithstanding all the fuss about cost of living), and what is happening in the eurozone, I can see an argument for waiting.

The housing market seems to have been damped down by the tightening of requirements for mortgages, and there is a decent case for waiting to see how these work through before using the interest-rate weapon. But we all know that in four or five years' time interest rates will be back to normal levels, and the practical difference between a new normal of base rates at 3-4 per cent and the old normal of 4‑5 per cent seems a bit academic.

Meanwhile I suggest that we celebrate the fact that the economy is creating so many jobs – or, rather, that the private sector is creating so many jobs, because the number of employees in the public sector is the lowest on a headcount basis since 1999. We must be doing something right.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Sport
ESPN footage showed a split-screen Murray’s partner Kim Sears and Berdych’s partner Ester Satorova 'sporting' their jewellery
tennis
Arts and Entertainment
Cold case: Aaron McCusker and Christopher Eccleston in ‘Fortitude’
tvReview: Sky Atlantic's ambitious new series Fortitude has begun with a feature-length special
Voices
Three people wearing masks depicting Ed Miliband, David Cameron and Nick Clegg
voicesPolitics is in the gutter – but there is an alternative, says Nigel Farage
Voices
The veterans Mark Hayward, Hugh Thompson and Sean Staines (back) with Grayson Perry (front left) and Evgeny Lebedev
charity appealMaverick artist Grayson Perry backs our campaign
News
i100
News
people
ebooks
ebooksA special investigation by Andy McSmith
Sport
Chelsea manager Jose Mourinho
footballThe more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Life and Style
Vote green: Benoit Berenger at The Duke of Cambridge in London's Islington
food + drinkBanishes thoughts of soggy school dinners and turn over a new leaf
News
Joel Grey (left) poses next to a poster featuring his character in the film
peopleActor Joel Grey comes out at 82
News
i100
News
business
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Recruitment Genius: Technical Report Writer

£25000 - £35000 per annum: Recruitment Genius: A Technical Report Writer is re...

MBDA UK Ltd: Indirect Procurement Category Manager

Competitive salary & benefits!: MBDA UK Ltd: MBDA UK LTD Indirect Procurement...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee