UK Monetary Policy – Labour market data “give one a better steer about the evolution of spare capacity than output growth alone says Ben Broadbent

Since the financial crisis “labour productivity has stagnated”, this has inevitably made the MPC “less confident about any forecast of productivity growth over the next few years” and meant that “output data are no longer sufficient statistics for inflationary pressure”. Ben argues that labour market data “give one a better steer about the evolution of spare capacity than output growth alone” and it was against this backdrop that, in August 2013, the MPC linked policy to unemployment in the first phase of forward guidance.

Since then, the MPC has been surprised by two things. Employment has grown “significantly faster” and “nominal pay growth has been much weaker” that we’d expected: during the first half of 2014, annual growth in average earnings has been around four standard deviations lower than one would have expected, given the level of unemployment and the Phillips-curve relationship between the two during the first twenty years of inflation targeting. This suggests that potential output may well have increased, but it’s been in the form of greater labour supply rather than greater productivity, as the MPC had anticipated.

Chosen excerpts by Job Market Monitor. Read the whole story at Bank of England | Publications | News Releases | News Release – Unemployment and the conduct of monetary policy in the UK – speech by Ben Broadbent

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