As I mentioned earlier, we are seeing currently a much greater dispersion of wage settlements. What if this is the beginning of a more far-reaching structural change in the economy which alters relative pay across occupations? To be clear, I am making no prediction here, but rather asking the question in the context of monetary policy. The first thing to say is that such changes do happen. Since the 1980s, we have seen a structural increase in the pay gap between higher and lower earners. We have also seen more structural changes in retirement ages over a longer time. So, structural changes can happen. It is not the job of monetary policy to prevent such changes, but rather to ensure that they do not have negative consequences for monetary stability, such as dislodging inflation expectations. On this point, it is worth remembering that an important reason why we have a positive rather than zero inflation target is to enable such changes in relative earnings to happen in a world of downward nominal wage rigidities. I started by quoting Friedman and Schwartz, and so I will end by doing the same. They emphasised the need to distinguish a change in price (or wage) levels from a persistent increase in the rate of change[3]. In my view, drawing this distinction is a crucial issue that we will be dealing with for some time. And of course, since it involves predictions of the future, for policymakers the task will not be easy.
And, it follows, that in such a situation they should do just that, they should not hold back. But we are left with a puzzle in the labour market. Data from HMRC suggest that there were around 1.7mn jobs covered by the furlough scheme in July, and as a reminder it comes to an end later this week. The number of advertised job vacancies was at a record level in August of over 1mn. The number of people unemployed in the three months to July was 186,000 higher than immediately pre-Covid, and the number of inactive people was 634,000 higher. Now, of course, it is possible to reconcile these numbers, but to do so involves a lot of movement of people from furlough, unemployment and inactivity, in ways not so far seen. There are a number of possible outcomes to this puzzle, which have different implications for the labour market. The first is that the furloughed workers will largely be re-absorbed into their old jobs, and so even with a further reduction in unemployment and inactivity, we are left with an excess of job vacancies. If these excess vacancies are associated with shortages of workers in particular sectors, this may push up on wages. This could also happen if furloughed workers do not return to their old jobs, but are not suitable for those jobs and sectors where there are a high number of vacancies. In other words, there is a mismatch in the labour market.