Earnings growth has failed to beat inflation over the past five years. Now Ben Broadbent, of the Bank of England, suggests that wage growth has permanently «shifted downwards»
Ben Broadbent suggested that workers may have to accept lower pay rises for longer
Workers could face consistently lower pay rises than those they grew accustomed to before the crisis, a senior Bank of England policymaker has warned.
After decades of stable increases in wages, it is possible that growth has “shifted downwards”, said Ben Broadbent, deputy governor for monetary policy at the Bank.
Addressing an audience of economists at the annual Jackson Hole conference in Wyoming, US, on Saturday, Mr Broadbent said “labour productivity has stagnated” since the crisis.
Earnings growth has failed to beat inflation over the past five years, only twice managing to rise in real terms. Mr Broadbent suggested that the UK may be experiencing a permanent reduction in the “established norm for real pay increases”.
The reduction helps to explain why the Bank’s interest rate setters – the Monetary Policy Committee (MPC) – got their forecasts for unemployment so wrong.
Mr Broadbent said the Bank “thought it would take some time” for unemployment to fall below 7pc based on an assumption that productivity would grow more quickly.
However, rather than taking two years, as the MPC had expected last August, unemployment fell below 7pc within just eight months. At the same time, pay increases have underperformed the expectations of the Bank.
So far this year, earnings growth is almost two percentage points weaker than its long term average, noted Mr Broadbent.
At the Bank’s last Inflation Report – the central bank’s quarterly update on the economy – Governor Mark Carney signalled that the MPC was now putting more weight on wages.
It was revealed on Wednesday that two of the MPC’s seven members voted for an increase in the Bank’s base rate this August, the first split on the committee in over three years.
Mr Broadbent said that while employment had risen “significantly faster” than the MPC had expected, “pay growth has been much weaker”, delaying a decision to raise interest rates.
Yet by the end of his comments, Mr Broadbent had struck a hawkish tone – suggesting that he might lean towards raising rates.
Commenting on the Bank’s new stress on labour market data, Mr Broadbent suggested that lower spare capacity could now “take longer to appear” in the data.
There is now a “trade-off between the accuracy of the information about inflationary pressure and its timeliness”, he said, perhaps indicating that he would favour a pre-emptive rise in rates.
Mr Broadbent and Andy Haldane are tipped by analysts to be next to call for higher rates, as both are considered to be at the hawkish end of the MPC spectrum.
