Taken together with workers’ apparent willingness to accept lower real pay levels, the non inflationary rate of unemployment, or NAIRU, looks to be at a lower level than we might have expected. The MPC already built into its August forecasts the possibility of some positive labour supply shock. It took the judgement then that, contrary to previous assumptions and the experience of previous recessions, the labour participation rate would be less affected by an ageing population. And, having seen little evidence of pay pressure, it took the view that the NAIRU had fallen to 5.5% – not far off the 5% rate that prevailed in the UK before the crisis. But even relative to last August’s judgement on labour supply, pay growth still looks weak relative to models calibrated on the pre-crisis period. At the same time, unemployment is still falling more rapidly than expected. 4  BIS central bankers’ speeches  The MPC is left with a judgement whether those falls in unemployment presage an imminent sharp pick up in pay growth. Or whether the continued weakness in labour costs means we can afford to let falls in unemployment continue to run for some time yet. As always with economics, it is possible to make a good case on either side. We will know more when we see the extent of pay pressures in the big annual settlement rounds in the first quarter of next year.
The question as always is whether the risk of not waiting until the picture is clearer is outweighed by the risk of not acting in time. To sum up, some of what the MPC, at the point I joined it, thought would happen has happened. We have gone from recovery to expansion. Growth is slowing to something close to its pre-crisis average. Investment has made and is making an increasing contribution to growth. But the behaviour of unemployment, productivity and, most recently, pay continue to surprise and puzzle. More “normal” relationships between these variables may reassert themselves quickly and the pay rounds next year in particular should illuminate some of the picture. But there is also reason to believe that some changes, as in labour supply, may be longer lasting. When I started at the Bank this time last year, the MPC was half way through the process of putting together its latest set of forecasts for inflation and growth. That process is now again in train. The softening in the pay and inflation data, together with the weaker external environment, for me implies that we can afford to maintain the current degree of monetary stimulus for a longer period than previously thought. That of course will be a subject for the MPC to debate in the coming weeks. BIS central bankers’ speeches  5