The main questions in the LFS are about employment status: do you have a job and, if not, are you looking for one? (If your answer to the second question is “yes” you are counted as unemployed, if “no”, economically “inactive”.) As well as these headline numbers,  the UK and the terms of trade have been broadly constant in recent years. Thus the only source of real wage growth, over time, is productivity growth. 4  The inverse relationship between the NAIRU and productivity growth has been noted in many countries (Staiger et al (2001), Slacacek (2005)) nor is real wage resistance the only possible reason for the link. More micro-founded approaches to the labour market, based on the costs of job search, also predict a negative relationship between trend productivity growth and the natural rate of unemployment. In that setting, in which employers trade off the cost of search against the prospective surplus from a new job, lower expected growth in productivity reduces the present value of that surplus and lowers the rate of job creation. The canonical description of this “capitalisation” effect is due to Pissarides (2000). BIS central bankers’ speeches  3  the ONS’s monthly labour market release publishes standard summary statistics about the duration of unemployment and the reasons for inactivity. But, at least since 1994, the LFS has also included a host of questions about the characteristics of employees and their jobs. These are listed in Table 1.
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.