15  This is the simple economics behind the Wage Philips Curve. Phillips (1958). For a modern interpretation see Gali (2011). 16  These effects likely dragged on pay growth by around 1 percentage point last autumn. The implications of this for inflation are limited: because these workers also have lower average productivity, the net effect on firms’ unit costs is likely to be broadly neutral. BIS central bankers’ speeches  13  A final possibility is that the moderation in wage growth reflects the low headline inflation rate. With widespread recognition that there is literally no inflation at present, bargaining over real pay is more straightforward. Indeed, there is some anecdotal evidence from the Bank’s Agents that slower increases in households’ living costs have been a significant driver of lower pay awards. A simple estimated Wage Phillips Curve suggests a similar conclusion.17 If this is occurring, this will slow the build-up of cost pressures. The MPC must remain vigilant for signs that low inflation is having second-round effects in the wage bargain, possibly via inflation expectations. The mechanical return to higher rates of inflation as past falls in energy prices begin to drop from the annual comparison should in time reverse this effect and support wage gains. More fundamentally, falling joblessness and a high ratio of vacancies to unemployment should support wage growth. At a minimum, such dynamics suggest the need to continue to eliminate slack smartly. Of course, what matters for inflation is not wage growth in isolation, but pay relative to productivity.
Thank you for your attention. BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11  12  BIS central bankers’ speeches  BIS central bankers’ speeches  13