6  15  0  -5  2  1983-2011 Wage Fitted 1971-1982 inflation 10 9 8 7 6 5 4 3 2 1 0 4 6 8 10 12 Unemployment rate  Sources: Thomson Reuters Datastream  Chart 14: Inflation Report forecast errors on wage growth and unemployment Unemployment  Wages  Percentage points  4 2 0 -2 -4 -6  2005Q2  2007Q2  2009Q2  2011Q2  2013Q2  Source: ONS and Bank calculations. Notes: Chart shows one year ahead errors. Wage forecasts were for Average Earnings Index until 2010Q2 and Average Weekly Earnings thereafter. The discontinuation of the AEI series in 2010Q2 means it is not possible to calculate wage forecast errors for forecasts made between 2009Q3 and 2010Q2, so those observations are left blank. See Yellen (2014). BIS central bankers’ speeches  7  Even after making these adjustments, however, the wage puzzle has persisted. This can be seen by comparing the actual and estimated paths of wages from the Bank’s suite of wage equations, using as inputs the Bank’s estimates of “slack” in the labour market, as well as productivity and other wage determinants. Wage growth has consistently and significantly undershot its expected path, even after controlling for slack and other shocks. Cumulatively, this undershoot is large, with the level of wages more than 2% below predicted estimates over the past two years. There are a number of possible explanations for this wage puzzle. These have potentially quite different implications for future wage growth and hence policy.
Finally, and crucially, in the aftermath of the financial crisis, we are working with our colleagues in Washington, D.C., and at other agencies to help put the nation’s financial system on a firmer footing. Yet, much remains to be done and we are determined to keep at it. I recognize fully that there can be no return to pre-crisis business as usual – whether on the part of the financial sector or on the part of regulators like ourselves. All in all, there is a lot to keep my colleagues busy. 2  BIS central bankers’ speeches  National economic conditions Now, let me update you on national economic conditions. We stand here today several years after the worst financial crisis in modern times. The origins of the crisis are complex, but it had its roots in the bursting of a credit bubble that had grown to great size during the middle part of the last decade. Prior to the onset of the crisis, a combination of rapid financial innovation and imbalanced global economic integration resulted in a mispricing of risk worldwide. This was particularly extreme in certain markets such as U.S. housing and housing finance. This mispricing of risk led to a misallocation of resources and an excessive build-up of debt in many parts of the global economy. Many – though not all – U.S. households responded to the easy availability of credit and rising home prices by taking on more debt.