Downgrade ‘rosy’ wages forecast, says report

 

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The Independent Online

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.

The Bank has estimated that average weekly earnings growth will 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. “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.”

They argue that 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 fall in union membership and the influx of workers from Eastern Europe.

Another downward revision of wage-growth forecasts could push back the rate rise that markets are pricing in for the first quarter of 2015.

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