Labour costs falling at record rate: Big jump in productivity reflected in first-quarter figures

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THE KEY measure of the international competitiveness of Britain's manufacturing industry is improving more quickly than at any time since the 1960s, the Department of Employment said yesterday.

Unit labour costs in manufacturing - the amount spent on wages and salaries to produce each unit of output - were 2.9 per cent lower from January to March than in the same period last year. Output per employee rose by 7.8 per cent in the same period, the sharpest increase for six years.

The figures reflect a sharp jump in factory output since the new year, which has been accompanied by only a small pick-up in manufacturing employment. Earnings growth in manufacturing continues to slow as pay settlements drop, in part because workers need smaller rises to compensate for lower inflation.

Average earnings grew by an unexpectedly small 4 per cent in the year to March, down from 4.5 per cent in the year to February. Average earnings growth has not been lower since the incomes policy of 1967.

The fall reflected low settlements and smaller year-end bonuses than last March, when many employers paid unusually large bonuses in case an incoming Labour government raised taxes.

Settlements coming through in March included the 2.5 per cent increase agreed for the footwear industry, down from 3.75 per cent last year.

Earnings growth in manufacturing slowed from 5 to 4.75 per cent in the year to March, with earnings growth in services decelerating from 4.25 to 3.75 per cent.

Ian Shepherdson, economist at Midland Global Markets, said he expected whole economy earnings growth to slow to 3.5 per cent in coming months, but economists at the stockbrokers UBS expect the current 4 per cent to be the floor.

Pay settlements, let alone earnings, are still outstripping inflation, which remains below 2 per cent.

The Confederation of British Industry reported that manufacturing pay settlements averaged 2.5 per cent in the first quarter, down from 2.9 per cent at the end of last year. Settlements in services dropped from 2.9 to 2.8 per cent. Average earnings growth falls less quickly because the comparison includes more than the most recent settlements.

Alastair Hatchett, of the analysts Incomes Data Services, said earnings growth differed significantly across industries. Lower year-end bonuses than in 1992 resulted in subdued earnings growth in chemicals, finance, distribution, retailing, food, drink and tobacco.

He added that although settlements appeared to have dropped in response to lower inflation since the new year, some were still running at around 4 per cent.

The labour market figures, which also showed unemployment falling for the third successive month, triggered a sharp rise in the pound.

It closed nearly a pfennig higher against the mark at DM2.5097 and 1.43 cents higher against the dollar at dollars 1.5550. Against a basket of other currencies, sterling rose by 0.4 points to 80.9 per cent of its 1985 value.

Car production rose again in April but commercial vehicle output fell for the third month running. According to the Society of Motor Manufacturers and Traders, car output was up 4 per cent last month on a year ago at 113,286. Manufacture of commercial vehicles, a leading economic indicator, was down by 33.5 per cent on April 1992 at just under 15,000.