Sir Jon Cunliffe, Deputy Governor for Financial Stability at the Bank of England:
“The big surprise, therefore, for the [Monetary Policy Committee] … has been the extent to which employment has been able to grow without generating more inflationary pressure through higher pay increases. Understanding why that has happened and how long it will persist is, in my view, now key to deciding policy.”
One possible explanation may be a longer-than-usual lag between falls in unemployment and pay pressure emerging, which could mean that inflationary pressure is building in the pipeline that will be more difficult to curtail if the Bank does not act now. However, another is that a combination of factors has caused labour supply – the amount of hours of labour available to the economy – to be much stronger than in previous recoveries, for example due to the increase in women’s state pension age and changes to the incapacity benefits regime. And the fall in unemployment has included a high number of long-term unemployed, who probably act as less of a drag on pay.
Yet despite the biggest squeeze on real incomes for nearly a century, there appears to be little evidence that workers are demanding a catch-up in pay, Jon observes, possibly due to a shift in the psychology of UK workers resulting from the sharpness of the recession and the years of austerity that have followed it.
Read more at Bank of England | Publications | News Releases | News Release – Monetary policy one year on – speech by Sir Jon Cunliffe.
There is an assumption that increased employment must demand increased pay. I am not sure that is accurate. Also, savings has not been discussed, just a belief that lower unemployment must equal pay increase.
One would expect wages to rise if surplus labor finds jobs — same labor supply meets increased demand. But we may be underestimating supply of labor. Participation rates could rise as the economy revives, keeping the lid on wages.
My point exactly. One MAY expect wages to rise with increased employment but that is not a dictate of the law of supply and demand. Slow labor that is increasing in a slow growing economy could easily exacerbate wage increases.