The Bank of England will be compelled to tear up its “rosy” wage growth forecasts once again, according to two of the country’s most eminent labour market economists.
In its most recent forecasting round the Bank estimated that average weekly earnings growth would accelerate to 3.25 per cent in 2015 and 4 per cent in 2016, implying real wage rises for workers.
But Stephen Machin, professor of economics at University College London and David Blanchflower, professor of economics at Dartmouth College and also a columnist for The Independent, will argue in a paper to be released next week that this forecast will have to be revised down.
“The evidence for this turnaround seems entirely lacking” they write in the paper. “There is no compelling evidence to suggest such a rosy scenario. It seems far more likely that nominal wage growth will once again disappoint on the downside”.
The two professors, who are acknowledged authorities on the UK labour market, argue the Bank’s Monetary Policy Committee is underestimating the amount of “slack” in the labour market and is therefore overestimating the upward pressure that will be exerted on wages.
“We think it singularly inappropriate for the MPC to reduce the amount of slack arbitrarily as they are doing with both the level of long-term unemployed and the amount of underemployment” they write. Other factors they identify as bearing down on wages are a secular decline in trade union membership and the influx of workers from Eastern Europe.
Another downward revision of wage growth forecasts by the Bank could have push back the next interest rate rise, which markets are currently pricing in for the first quarter of 2015. But a failure of wages to pick up before next May’s general election could also have political implications.
Average weekly wages, adjusted for inflation, are still around 5 per cent below where they were when the Coalition was formed in 2010. And wages are a full 10 per cent lower than they were when the Great Recession began in 2008.
Average wages grew by just 1.25 per cent in 2013, below the 2 per cent rate of consumer price inflation, meaning that in real terms pay fell. The Coalition hailed the fact that total pay grew by 1.9 per cent in the three months to March, while annual inflation fell to just 1.6 per cent, as a sign that the great squeeze on wages and living standards was finally ending. But the annual rate of wage growth has since fallen back sharply.
The low growth rate is partly due to a distortion in the annual comparison, as many high earners shifted bonuses into the 2013/14 tax year to take advantage of the lower top rate of income tax. But regular pay, excluding bonuses, has also fallen back since the spring, rising by around just 0.7 per cent on average each month between May and July.
The Bank’s August estimate for 2014 wage growth of 1.25 per cent was itself a big downgrade on its estimate three months before. In May the Bank had predicted annual wages would grow by 2.5 per cent this year.Reuse content