11  It’s also important to note that, although immigrants are disproportionately represented in low-skilled occupations, they are not, on average, any less well qualified than UK-born people (to the extent domestic and foreign qualifications are comparable). In fact, according to the Migration Advisory Committee, one reason some employers have preferred immigrants for low-skilled jobs is that they “have higher level qualifications than their low-skill job requires”. 12  BIS central bankers’ speeches  Chart 11: Real pay growth more variable  To be sure, you’d tend to under-estimate the  when adjusted for compositional effects  cyclicality of “underlying” wage growth12 and the true slope of the Phillips curve. Over the past few years, as in earlier cycles, real pay growth for people who stayed in their jobs13 has been more variable than the average (Chart 11). But if it’s a really regular thing – if the compositional effects always move in lock step with unemployment – then a Phillips curve estimated on an unadjusted AWE series would still take them into account, only implicitly so. Source: ONS and Bank calculations  12  This point was made by Bernanke (1987) and, in a well-known paper, by Solon et al (1995). 13  To be precise, the red line is pay growth for someone with fixed characteristics – fixed educational qualifications and occupation, unchanging experience. Since any individual’s experience is bound to grow over time (if only by virtue of getting older) there is no such person in real life!
Also, because of the way we’ve done this regression – for the sake of simplicity it’s been estimated in one go, using the entire 20-year sample – we’re implicitly  5  As I said, there are potentially hundreds of detailed occupational descriptions from which LFS respondents can choose. The ONS’s standard scheme then makes high-level classifications – “high skill” occupations, for example, whose job creation rates are plotted in blue in Chart 7, are defined as “managers, directors, professional, associate professional and technical”; “low skill” refers to sales and “customer services, process and plant operatives, elementary”. 4  BIS central bankers’ speeches  assuming that changes in each of the characteristics have constant effects over time6. But there’s a substantial economic literature explicitly devoted to explaining changes in some of these coefficients, notably the labour-market returns to better qualifications (the “skill premium”). I’ll come back to this point later. Second, the estimated compositional effects have been driven mainly by changes in the mix of people, and their individual characteristics, not by shifts in employment across sectors. Pay clearly differs across industries, even controlling for those characteristics. And on occasion sectoral shifts can matter for average earnings. In Chart 7 the marginal contribution of changes in employment across industries is in red. Thanks mainly to disproportionately large job losses in the financial sector, where pay is higher than average, these were negative in 2003 and 2009.