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Why Is Unemployment down in the US and the United Kingdom?

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United Kingdom’s unemployment rate curve is declining

The ONS (Office for National Statistics) came out with the unemployment rate for the United Kingdom on March 18. It revealed that unemployment held steady at 5.7% for yet another three months to January 2015. Unemployment in the United Kingdom also stood at 5.7% in the three months to December 2014.

Overall, the unemployment rate in the United Kingdom showed a declining trend over the last six years. However, its declining trend was at a slower pace than the US. The US job market improved a lot after the recession. According the U.S. Bureau of Labor Statistics, from the peak of 10% in October 2009, the rate was down to 5.5% in February 2015.

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Real wages improve in the United Kingdom

The Eurozone’s bond buying program pushed the sterling higher. It reduced the price growth in the United Kingdom. In a report dated March 18, the Bank of England warned that, “Britain is ‘more likely than not’ to suffer a temporary bout of deflation in the coming months.”

According to January estimates, the inflation rate in the United Kingdom already fell to a 55-year low of 0.30%. However, the slump in inflation is benefiting households. Food and fuel are becoming cheaper. Household wages are also rising. The report highlighted that wages in the United Kingdom are rising at a 1.8% rate including bonuses. Excluding bonuses, wages are rising at a 1.6% rate in the three months to January 2015.

Although the figures came in a little weaker than the December figures, real wage growth—adjusted for inflation—has been rising in recent months in the United Kingdom.

Wage growth in the US

In the US, inflation figures are still far from the FOMC’s (Federal Open Market Committee) target of 2%. Wage growth in the US has been at a relatively slow pace. While the US labor market is showing signs of a strengthening US economy (SPY) (VOO), the weakness in wage growth is putting pressure on corporate earnings.

The declining oil prices are already impacting US energy companies’ earnings—like Transocean Ltd. (RIG), Ensco Plc (ESV), and Nabors Industries Ltd. (NBR). Wage growth in the US has been slow due to technological advances and off shoring. However, as the employment rate continues to improve, labor’s share in corporate income would increase. This would imply a squeeze on the capital’s share. This doesn’t bode well for corporate earnings from an equity performance perspective.

There were also some key indicator readings from South Africa. The readings led to the rand strengthening against the US dollar (UUP).

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