Economists warn of Labour Force Survey data reliability as UK unemployment rises to 5%

UK policymakers and economists have warned that the challenges faced in the country’s labor market might have been exaggerated. Their comments come after fresh data have changed the conversation in Westminster and financial markets ahead of the budget.

Regarding this recently released data, reliable sources report that unemployment unexpectedly spiked by 0.2 percentage points to reach a record of 5% in the three months leading up to September. This surge was the highest recorded at any time since the onset of the pandemic.

This increase captured the attention of opposition politicians and traders, who began to forecast a December interest rate reduction. The rise also resulted in the drop of two-year gilt yields to their lowest point in over a year.

Still, economists are voicing concerns about unreliable data being the primary cause behind this increase.

Recent UK labor market reports raise concerns  

Earlier, the Office for National Statistics (ONS) initially faced challenges with the accuracy of its labor market reports. This led the relevant authorities to look for other alternative indicators of economic activity. These indicators shocked the country after demonstrating a much steadier situation. 

Megan Greene, a member of the Bank of England’s committee that sets interest rates, weighed in on the situation. Greene downplayed the significance of the official figures on Tuesday, November 11. She acknowledged that there are numerous problems with the Labour Force Survey.

Meanwhile, it is worth noting that the job market is under close examination both at the Bank of England and Westminster. This move was initiated after Chancellor Rachel Reeves faced criticism for raising expenses for workers in her first budget.

Following this situation, Greene noted that recent data suggest that the impact of Reeves’s payroll tax hike has mostly been in the past. On the other hand, opposition politicians from Reform UK and the Conservative Party used these figures to criticize the Labour government’s economic policies. 

Another economist who voiced concerns about these figures is Robert Wood, chief UK economist at Pantheon Macroeconomics. According to Wood, the overall unemployment figure illustrates “erratic” data trends, with low response rates in the later survey rounds. 

“It seems like this is partly a problem with sampling variability. The last time we noticed this was in mid-2023 when the unemployment rate quickly dropped,” Wood explained. 

Reeves’ first budget plan resulted in significant job losses

In late 2023, following a drop in responses to the Labour Force Survey (LFS), the ONS, the UK’s largest independent producer of official statistics, was compelled to temporarily pause the publication of its headline unemployment, employment, and economic inactivity estimates, all of which are underpinned by LFS responses. Though they later reintroduced them and are working on a new online survey, economists still regard the LFS with skepticism.

Notably, the ONS calculates its main unemployment rate using a three-month average to smooth out fluctuations, as it surveys the same group of people every three months. 

Based on data from the ONS, the unemployment rates in August and September were 5.3% and 5% respectively, marking higher joblessness compared to when those groups were last surveyed. They mentioned that comparing this information with other indicators is challenging due to significant data changes.

Tax data, closely monitored by many individuals, has shown that the number of workers on payrolls has dropped drastically by 180,000 since Reeves’ first budget in October 2024. However, sources pointed out that this figure is frequently revised, and initially showed significant job losses after her fiscal plans went into effect.

Despite its flaws, economists expressed that labor market data could be important for the BOE in deciding whether to cut interest rates next month. This anticipation prompted JPMorgan Chase & Co. to forecast a rate cut in December after having expected the next decrease in February.

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