Outlook: Penny bet on the wages-jobs spiral

Anybody who used to visit old-fashioned seaside amusement arcades will remember the penny falls. The pennies would mount up until one finally sent the whole pile tumbling over the edge in a cascade of coins. Watching the month-by-month declines in unemployment produces a similar sense of anticipation. A drop of 11,000 here, 21,000 there - will next month bring the one that shatter the barrier of pay restraint and sets earnings off on an inflationary spiral?

Unemployment, on the most reliable official measure, is at its lowest for seven and a half years at 7.1 per cent yet earnings are growing at just 4.25 per cent. Some economists argue that the British jobs market has therefore fundamentally changed; others say it can't last and higher pay claims will soon start to pile up.

Certainly, the rate of unemployment below which wage inflation would start to take off is lower than it used to be. A higher standard of education amongst the workforce and all those 1980s "flexibility" measures have had some impact. The supply of suitably skillful and adaptable workers has increased to meet the increased demand for employees as the economy has recovered.

The clear lesson is that inadequate labour supply has been at the root of Britain's unemployment problem, not insufficient labour demand.

If demand continues to rise, it will only start to boost pay inflation if it now runs into a labour supply barrier. The signs are that this is not as much a constraint as the pessimists fear. Employers have been remarkably successful at drawing into the jobs market people who were not previously unemployed - women, pensioners and foreigners. This helps explain why pay has been so restrained as unemployment has fallen. It does not mean it will continue to stay tame, but does suggest the jobs market will keep away from the inflationary edge longer than some experts fear.