Chart 1 plots successive Bank of England forecasts of wage growth since 2012. Wage growth in the UK has persistently disappointed to the downside, on average by around 1 ¼ percentage points one year ahead. Part of the explanation lies in weak UK productivity, a key determinant of firms’ ability to pay workers. This, too, has persistently disappointed to the downside, with a mean error of around 1 percentage point one year ahead. Nonetheless, it is clear that wages have been weaker than can be explained either by slow productivity growth or by the other factors which typically affect wages, including the degree of slack in the labour market. This can be seen by looking at the unexplained components from the Bank’s wage equations (Chart 2). These residuals have been predominantly negative over recent years. That is despite on-going refinements to the Bank’s judgements on the labour market, as wages have come in short of expectations. This weakness in wages is the more surprising because it has come against a backdrop of a booming jobs market in the UK. Employment has increased by around 2.5 million people since 2011. Unemployment in the UK has fallen from its peak of 8.5% in 2011 to almost 4.5% currently. It has also fallen significantly in every region in the UK. Here in Yorkshire, unemployment has fallen from 10% to around 5% over the past few years, its lowest level since the 1970s.
The fundamental issue is whether U.S. monetary policy has helped support our dual objectives of maximum employment in the context of price stability, and whether this support is consistent with a healthy global economy. Moreover, it is far from clear that explicitly coordinated policy would produce better outcomes for the global economy generally, or EMEs specifically. Central banks face enough challenges in tailoring policies to their own domestic circumstances. I believe that it would be taking on too much to attempt to collectively fashion policy in reference to global conditions. Monetary policy meant to suit everybody is likely in the end to suit nobody. Similar considerations underlie the widespread move in the emerging world away from fixed exchange rate regimes. Policymakers worldwide have learned that a framework capable of responding in a disciplined but flexible manner to changing domestic conditions works best over the long run. While explicit coordination looks neither feasible nor desirable, there is more that central banks in general, and the Fed in particular, could do to be better global stewards. As an example, recent events demonstrate the importance of effective Fed communication. It is clear, in retrospect, that our attempts in the spring of 2013 to provide guidance about the potential timing and pace of tapering confused market participants. Market participants seemed to conflate the prospective tapering of asset purchases with monetary policy tightening, and pulled forward their expectations about the likely timing of liftoff and raised their expected paths for policy rates.