Why Britain's surprise drop in unemployment isn't as great as it looks

Britain's government just surprised everyone by releasing a better-than-expected drop in the unemployment rate - it fell to the lowest level in 7 years.

But Fabrice Montaigne and his team at Barclays says that while the the UK labour market paints a "broadly positive picture," some of the detail "calls for caution." In fact, they say we should be a little worried about wage data which is extremely fragile.

British unemployment tumbled to 5.4% in August, compared to analyst consensus of 5.5%. More people found jobs with employers that paid a regular wage (+58,000) while the self-employed fell by 16,000.

It looks like good news all round.

However, Barclays pointed out that if we dig a little deeper into the numbers, we can see some warning signs surrounding wages. Basically, core wage growth is the biggest issue in the long term and if it doesn't rise more rapidly, it could hurt real wages. Here's what they said:

While the August unemployment rate fell to 5.4%, we acknowledge the surprisingly large increase in the September claimant count warrants caution as it may rebound in the coming months.

Further, although core wages have marginally decelerated, given recently weak inflation, real wages are growing strongly, now at 2.7% 3m/y, supporting strong consumption. However, if our inflation forecasts are realised, and core wage growth does not pick up at an increasing rate, we could begin to see real wages dip, and eat into consumption, supporting our view that this is to slow into H2 15.

Earnings were a little weaker than analysts expected, with wages excluding bonuses up by 2.8% year-on-year, and up 3% including bonuses, according to the Office for National Statistics.

Analysts were expecting earnings to have increased by 3.1% including bonuses, and regular pay to have risen 3%. The UK has recorded a depressing slump in real wages since the crisis, with many of the new jobs created in low-paid sectors.