In common with other forecasters, the MPC has consistently been surprised by the weakness of wages, given the strong cyclical bounce in job creation. It has over-predicted the path of wages in recent years (Chart 29). There are a number of possible explanations for this wage weakness. One is that there is simply greater labour market slack in the economy than we have estimated. Another is that the narrowing of slack is having less impact on wage pressures than in the past – the slope of the so-called Phillips curve is flatter. There is international evidence of the Phillips curve having flattened over recent decades (IMF (2006, 2013), BIS (2014)). That might arise because technology has made it easier and cheaper than ever before to substitute labour for capital, man for machine. That is the very essence of the Second Machine Age hypothesis. It would manifest itself in weaker than expected wage growth and a secular fall in the labour share of income, both of which we have seen in a number of countries. The central projection in the November Inflation Report assumes the labour share reverts over time to its historical mean, with the fruits of productivity harvested by labour and capital in line with their historical shares. And because wages have lagged behind productivity for several years, this implies the labour share is currently at a cyclical low, but would be expected to mean-revert in the period ahead.
The outcome is obviously the major uncertainty surrounding the global economic prospect, and policymakers elsewhere can only monitor, continuously and very closely, the emerging evidence and react to that in the light of its likely impact on their own situation. The US slowdown comes at a particularly bad time for Japan which is already suffering from a combination of weak domestic demand – particularly consumer demand – and supply-side constraints reflecting pressures on the banking system, heavily burdened with non-performing loans, and an acknowledged need for restructuring parts of the non-financial sector. Japan has pretty well exhausted the scope for macro-economic stimulus. Successive fiscal packages focussed on public works, and a sustained period of attempted monetary expansion, at near-zero interest rates in the face of deflation, have failed to overcome a high rate of precautionary saving by an ageing population facing an uncertain economic future. The policy emphasis of the new Japanese administration appears to be shifting towards firmer action to bring about supply-side reform in the belief that this will help to engender greater confidence. The danger is that, to the extent that more aggressive restructuring  2  BIS Review 47/2001  results in bank ruptcies and higher unemployment in the short term, that in itself might tend to weaken consumer demand for a time before the benefits of the restructuring come through. I make no judgement about the prospects in Japan. You certainly are better placed to do that than I am!