16  The curve has flattened  A lowering of the curve does not change the sensitivity of pay growth to unemployment, and changes in unemployment, will put pressure on pay growth in the same way. It will all just happen at a lower level. A flattening of the curve, however, reduces the sensitivity of pay growth to unemployment at all levels and to all rates of change of unemployment. This appears to have happened in some estimations of the post crisis estimations of the curve. 15  17  See Broadbent (2014)  16  This could result in a ‘double whammy’: pay growth would be accelerated higher demand for labour while at the same time the inflation adjusted curve would shift up, accelerating pay growth further. This can be seen in Chart 8: a fall in unemployment would result in moving from point A to point B (at higher inflation expectations) or point C to point D (at lower expectations). If those inflation expectations were to change at the same time that unemployment falls, the move would be from C to point B. See also Mishkin (2007). 17  See for example BIS (2017) and IMF (2013). Blanchard et. al. (2015) argue that since 1990 there is no statistically significant slope to a price Phillips curve in many countries, including the UK.
And there has been extensive work on labour market dynamics and frictions to establish the point at which the level of unemployment accelerates the rate of inflation which, for the same of simplicity, I will refer to here as the natural rate. 9  However for nearly 5 decades the essential framework of a labour market impacted by inflation expectations that clears with lags around a natural rate of unemployment over the business cycle (or trade cycle in Phillips’ original work) has played a fundamental role in modern macroeconomic models, including those used as part of their forecasting machinery by monetary policy makers, like the Bank of England. So for monetary policymakers the apparent disappearance of the link between pay growth and employment is, as I have said, one of the key puzzles of the post recovery economy in the UK and in advanced economies. It has of course attracted a great deal of attention. I am afraid I do not have the answer to the puzzle to give you here tonight. I suspect that for many years to come, economists in academe and elsewhere will be occupied - and arguing - about this period and revisiting (again) the established Phillips curve framework. But policy makers cannot just ‘down tools’ until we have a better understanding. So I do want tonight to look at some of the main candidate explanations and what they might mean for the policy maker.