“Education and Lifetime Patterns of Unemployment,” Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S117–31, October. Phillips A. W.,1958, “The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957”, Economica. Pissarides, C., 2000, “Equilibrium Unemployment Theory”, Massachusetts Institute of Technology, 2nd edition Slacalek, J., 2005, “Productivity and the Natural Rate of Unemployment”, Department of Macro Analysis and Forecasting, DIW Berlin Solon, G, R. Barsky, and J.Parker, 1995, “Measuring the Cyclicality of Real Wages: How Important is Composition Bias?” Q. J. E. 109 (1994), pp. 3–25. Staiger, D., J. H. Stock and M. W. Watson, 2001, “Prices, Wages and the U.S. NAIRU in the 1990s”, NBER Working Paper no. 8320. 8  BIS central bankers’ speeches  Chart 1: Large flows into and out of  Chart 2: Growth of average wages weak in  employment  2013, 2014 despite low unemployment  Source: Labour Force Survey and own calculations Source: ONS, Bank of England, NIESR and Hills, Thomas, Dimsdale (2010) Note: AEI until 2010 and AWE since; inflation expectations as implied by indexed gilt market; 2014 diamond is for H1.
In other words, such shocks tend to put upward pressure on the NAIRU (at least initially, they move you rightwards along the Phillips curve in Chart 2, not downwards4). Yet, for much of the past two years, pay growth was weak even as unemployment declined sharply. I commented on the striking flexibility of real wages in a speech last summer, from which Chart 2 is taken. Suppose, however, that the drop in productivity has had nothing to do with existing jobs but instead reflects the skew in the creation of new jobs towards relatively less productive, less well-paid roles. To that extent, there’s no real-wage resistance, among existing employees, to overcome, and the arithmetic impacts on average pay and average productivity are necessarily immediate and coincident. This would also help to explain why pay surveys, which track wages of the median employee (rather than the average), appeared to over-predict wage growth in 2013 and 2014 (Chart 6): they failed to take account of changes in the mix of employment. You can see from Chart 6 that when the compositional effects were positive, during the recession, the surveys undermeasured AWE growth. Finally, these shifts can also shed light on the most recent trends in the aggregate data. The latest estimates show that the compositional effects have risen during the first half of this year – the skew towards lower-paid jobs has diminished.