Wage inflation fails to catch up

Any remaining doubts about the state of the labour market are removed by the fall in unemployment announced yesterday - it's going like a train, however much the Government's usual jiggery-pokery with the definition has exaggerated the decline. Yet even more remarkable than seeing headline unemployment below 2 million just in time for Christmas is the fact that underlying earnings growth has remained so low.

Wage inflation has edged up - there is no other way to describe it - from 3.25 per cent to 4 per cent during the past year. During the same period the number of people claiming unemployment benefit has dropped by more than 300,000, taking the headline jobless rate to its lowest since early 1991. What has happened to the traditional British surge in pay claims when the jobs market gets a little bit livelier than moribund?

More economists are starting to argue that labour market deregulation has at last achieved at least a mini-miracle for the British economy. The rate of unemployment below which further declines trigger inflation has possibly or probably fallen, allowing the economy to grow a bit faster before running into the inflationary buffers. That rate - the "non-accelerating inflation rate of unemployment" or "nairu" to economists - might be closer to 6 per cent rather than 7 to 8 per cent.

But that does not mean the Chancellor can cheerfully watch the economy build up steam without resorting to another interest rate increase to moderate the pressure. If unemployment were to continue falling at the same speed as last month, wage inflation would start climbing in no time. That process has already started in the service industries, which have been expanding at a racy pace.

Nonetheless, there has plainly been a significant shift in the relationship between the state of the labour market and wage inflation, and for that the Government can take some credit.