This reflected the intuition that the downward pressure on firms’ margins from higher oil or import prices would tend to result in downward pressure on real wages as firms sought to restore margins. The NAIRU captures the shift in unemployment required for workers to accept this real wage adjustment. These alterations in the main estimates of the output gap were pragmatic responses by the MPC to changes taking place in the economy. It is not appropriate to ask which of these proved in some sense “better” given that the different measures were reflecting the MPC’s judgements about different economic events. In any case, the sequence of oil price fluctuations and the depreciation of sterling in 2007–08 have had short-term impacts on inflation which have tended to make it more difficult to judge the trend underlying this greater volatility. However, earlier in the MPC’s life there is some indication that the committee tended to overestimate inflationary pressure. Up to the end of 2003, the MPC produced fan charts around projections for RPIX inflation. During this period of relative inflation stability, those projections were broadly clustered around the outturns, and indeed inflation was generally quite close to target. However, outturns of RPIX, excluding the (misleadingly-named) housing depreciation component of the index, would have tend to be below the projections (Chart 1 shows the opening up of the gap between RPIX and RPI excluding housing costs). The MPC does not pretend to any ability to project house prices, although there are some broad assumptions underlying the central projection.
Chart 7, summarising the results, is a version of a graph we published in the last two Inflation Reports. Note that, over time, the effects have tended to be positive. The average age and experience of the workforce has grown; more people have gone into higher education and higher-paid occupations. But on top of that underlying trend, we’ve seen sharp movements, in both directions, during the recent cycle. Both the drop in job creation during the Great Recession, and the corresponding pick-up during the recovery, were skewed towards the less skilled, less well paid end of the jobs market. Chart 8, which plots the differences in job creation across three classes of occupational characteristics, depicts one aspect of that pattern5. You can see similar differences in rates of job creation between young and old, less and more educated. And as I outlined in the introduction, the effect of these swings was to add materially to the growth of average earnings during the downturn and to subtract from it in 2013 and 2014. Unskilled employment generally more cyclical Before asking why this has happened let me make a few points about the estimates. First, there are some approximations involved. One involves the mix of surveys: we’re estimating the impact of compositional changes on LFS pay data and assuming the effect simply carries over to the AWE. That’s the most reasonable assumption, but it’s an assumption nonetheless.