And nominal regular pay growth (which strips out bonuses, but includes merit related increases in pay) has remained subdued over the past year, averaging around 2%. Assuming that the potential growth rate of the economy has not been damaged by the financial crisis (and there is no compelling evidence to suggest that it has), then this level of wage growth would be too low to be consistent with the inflation target in the medium term. Looking ahead, it is most likely that there will remain a reasonable margin of slack in the labour market, which should help contain any pressure on nominal wages and hence price inflation. But this is unlikely to persist indefinitely. Historical analysis of the UK labour market shows that the longer individuals are unemployed, the lower their chances of getting a job become. Hence, persistently high actual unemployment tends to be followed by an increase in the level of structural unemployment. Theory and empirical evidence predict that the structurally unemployed exert less downwards pressure on wage inflation. Major shifts in the pattern of employment – as we are likely to see from the shifts in growth from services to manufacturing, and from the public to private sector – tend to reinforce that effect. If structural unemployment rises sufficiently, then the downwards pressure on inflation from spare capacity will eventually start to dissipate. For now, contacts of the Bank’s Agents confirm that the margin of slack in the labour market should continue to restrain wage growth in the coming months.
And this is exactly the opposite of what should have been happening if a functioning banking and contingent fiscal union had been emerging. So we are risking creating a half-baked BU which will not necessarily be ready for future bad times. And it is also a partial answer to the question of potential participation of some non-euro countries in the SSM. Simply, it is too premature to judge whether the BU is going to be a good project worth participating, or not. Only after the whole project with all it “legs” is created can one seriously answer this question. 2  BIS central bankers’ speeches