Unemployment, Demographics, and Wage Trends: What the Headlines Miss

In the last post, we looked at the big productivity puzzle. Record employment, weak economy. More jobs, less output per person.

But that’s only half the labour market story. The other half is about how we measure unemployment, who’s actually in the workforce, and what wages are really doing.

This is Chapter 3, Part 2 of the Trading Economics series. And it gets into the details that separate a casual observer from someone who actually understands what’s going on.

The Phillips Curve: A Relationship That Broke Down

There used to be a neat relationship in economics. When unemployment was low, wages went up. When unemployment was high, wages stayed flat or fell.

This was called the Phillips Curve, named after the economist who spotted the pattern in UK data going back to the 1860s.

Here’s how it works. When jobs are plentiful, employers compete for workers by offering higher pay. That pushes wages up. When jobs are scarce, workers compete for positions and accept lower pay.

Simple enough. Except it stopped working reliably.

Over time, the relationship between unemployment and wage inflation became weaker and less predictable. Unemployment could fall without wages rising much. Or wages could spike even when unemployment wasn’t particularly low.

Why? Because other factors got in the way. Globalization, technology, union decline, changes in how labour markets function. The world got more complicated than a single curve could capture.

NAIRU: The Unemployment Rate Nobody Can See

Economists still believe there’s some unemployment rate where inflation stays stable. Not rising, not falling. Just holding steady.

They call it NAIRU. The Non-Accelerating Inflation Rate of Unemployment.

Here’s the idea. If unemployment drops below NAIRU, employers have to pay more to attract workers. That pushes costs up, which pushes prices up, which means inflation. If unemployment is above NAIRU, there’s enough slack in the labour market to keep wages and inflation in check.

But here’s the problem. Nobody knows exactly what NAIRU is. You can’t observe it directly. Economists estimate it using models, and those estimates change over time.

It’s useful as a concept. Central banks think about it when setting interest rates. But treating it as a precise number is a mistake. It’s more of a moving target.

Two Ways to Count Unemployed People

Not everyone agrees on who counts as unemployed. That’s why there are two main measures in the UK.

The claimant count. This counts people who are actually claiming unemployment benefits. It’s simple and comes out monthly. But it only captures people who are in the benefits system. If you’re unemployed but don’t qualify for benefits or haven’t applied, you’re invisible.

The ILO measure. This comes from a survey called the Labour Force Survey. It uses the International Labour Organization definition: anyone who is without a job, has actively looked for work in the past four weeks, and is available to start within two weeks.

The ILO number is always higher than the claimant count because it catches people the benefits system misses.

Here’s the thing. These two numbers can move in different directions. Policy changes that make it harder to claim benefits will drop the claimant count without actually reducing unemployment. The ILO measure won’t be affected by those same changes.

So which one should you watch? Both. But understand what each one is actually measuring.

Economic Inactivity: The Hidden Number

There’s a third category that often gets ignored. People who are not employed and not looking for work.

These are the economically inactive. Students, retirees, people caring for family members, people with long-term health conditions. They’re not in the labour force at all.

The UK inactivity rate matters because it tells you about the true supply of labour. A falling unemployment rate sounds good. But if it’s falling because people gave up looking for work and became inactive, that’s not the same as people actually finding jobs.

You need to check the inactivity rate alongside unemployment to get the real picture.

The Participation Rate

Related to inactivity is the participation rate. This is the proportion of working-age people who are either working or actively looking for work.

A high participation rate means more of the population is engaged with the labour market. A falling participation rate can signal problems, like discouraged workers dropping out or demographic shifts as the population ages.

Demographics: The Slow-Moving Force

Here’s something that doesn’t make headlines but matters enormously. The UK’s working-age population growth is slowing.

This is basic math. GDP growth comes from two things: more workers and higher productivity per worker. If the working-age population stops growing, you need productivity gains to pick up the slack. And as we covered in the last post, productivity has been disappointing.

Slower working-age population growth puts a ceiling on how fast the economy can expand. It also affects the tax base, pension funding, and public finances. Fewer workers supporting more retirees is a structural challenge that doesn’t go away.

Youth Unemployment: The Sharpest Edge

Young people got hit hardest by the recession. Youth unemployment was significantly higher than the overall rate.

This makes sense if you think about it. When firms are cutting costs, the last hired are usually the first fired. Young workers have less experience, less seniority, and are easier to let go.

But high youth unemployment has long-term effects. People who enter the job market during a recession earn less for years, sometimes decades, afterward. They miss out on early career development. They may accept jobs below their skill level and get stuck there.

It’s one of the more damaging consequences of a downturn. And it shows up clearly in the age breakdown of labour market data.

Vacancies: The Demand Side

Unemployment tells you about the supply of labour. Vacancies tell you about demand.

Tracking job openings shows you where employers are looking to hire. Rising vacancies alongside falling unemployment is a sign of a tightening labour market. Falling vacancies with rising unemployment signals a weakening economy.

The ratio between vacancies and unemployment is particularly useful. A high ratio means lots of jobs relative to jobseekers. A low ratio means the opposite.

Hours Worked: Not All Employment Is Equal

Even if the number of employed people goes up, total hours worked might not.

This is critical. If more people are working but each person works fewer hours, the total labour input to the economy might be flat or even falling.

After the crisis, the shift toward part-time work meant that headline employment gains overstated the actual increase in work being done. More people with jobs, but fewer hours being worked in total. That’s another reason why the productivity numbers looked so bad.

Unit Labour Costs: The Competitiveness Signal

Unit labour costs measure how much it costs to produce one unit of output. It’s basically wages divided by productivity.

Here’s why this matters. If wages are rising but productivity is falling, unit labour costs go up. That makes a country’s goods and services more expensive relative to competitors.

Rising unit labour costs with falling productivity is a bad combination. It means you’re paying more to produce less. That erodes competitiveness and can show up in trade deficits over time.

Regional Differences

One more thing the headline numbers hide: regional variation.

Unemployment varies hugely across UK regions. London and the South East typically have lower unemployment than the North East or Wales. National averages smooth over these differences.

If you’re trying to understand the actual state of the labour market, regional breakdowns give you a much more textured picture. A national rate of 7% could mean 4% in one region and 12% in another.

International Comparisons

The UK’s harmonized unemployment rate lets you compare it with other countries on an apples-to-apples basis.

Different countries measure unemployment differently. The harmonized rate uses a standard methodology so you can actually compare the UK with France, Germany, the US, and others.

This matters for investors looking across borders. If UK unemployment is 5% and France’s is 10%, that tells you something about relative economic strength, consumer spending potential, and policy direction.

What Labour Market Data Tells Investors

So why should you care about all these details?

Here’s what labour market data helps you figure out:

Interest rate direction. Central banks watch the labour market closely. A tightening labour market with rising wages might push them toward rate hikes. Weak employment data might hold rates lower for longer.

Consumer spending power. Employment and real wages drive consumer spending. If people have jobs but their real pay is falling, spending will eventually slow down.

Wage inflation pressure. Rising wages can feed into broader inflation. If unit labour costs are climbing, companies pass those costs on through higher prices.

Each piece of the labour market puzzle connects to something that moves markets.

The Takeaway

Labour market data is complex. The headline unemployment rate is just the starting point.

To really understand what’s happening, you need to look beneath the surface. Part-time versus full-time. Demographics. Real wages versus nominal wages. Productivity. Regional breakdowns. Inactivity rates.

The post-crisis UK economy taught us that record employment doesn’t necessarily mean a healthy economy. And that lesson applies every time you read a jobs report, no matter what country it’s about.

The numbers matter. But which numbers you look at matters even more.

Previous: Labour Markets, Employment, and the Productivity Puzzle After 2008

Next: Inflation Explained: History, Causes, and Consequences