MNI INTERVIEW Ex-MPC Blanchflower Doubts BOE Earnings Optimism

By David Robinson

     LONDON (MNI) - Hidden labour market slack persists in the U.K. even though

workers no longer complain of insufficient paid hours, helping to explain

continuing weakness in wage growth, former Bank of England Monetary Policy

Committee member David Blanchflower told MNI.

     While an imbalance between the number of hours employees want to work and

the number they actually work has disappeared since early 2018, Blanchflower

said the labour market was still not running as hot as prior to the financial

crisis, when workers overall sought more leisure time.

     "It is this that matters. There is a lot more slack. In equilibrium, more

people want fewer hours than more hours," he said in an interview.

     Blanchflower has long argued that central banks relied too much on

unemployment levels for determining expectations of wage growth. Critics have

responded that measures of underemployment have now eased, and some of his

suggestions have been taken on board by the Bank of England's current MPC, but

he insisted to MNI that labour market slack is still greater than officially

acknowledged.

     "Unemployment doesn't enter a wage equation any more. It doesn't, the

underemployment rate does," Blanchflower said.

     He pointed to the MPC's forecasts from early 2014 through to the end of

2018 which repeatedly over-estimated earnings growth, at times expecting it to

pick up to around 4%, close to its typical pre-crisis level. In the event, wages

grew by 2%-3%.

     "They kept saying it is 2% and it is going to be 4%. They got it wrong 22

times in a row. At some point that will happen ... Eventually a stopped clock is

going to be right," Blanchflower said.

     While UK earnings growth has now ticked higher, it will not get back to the

levels previously expected and there are already signs of growth tailing off, he

said.

     The MPC's productivity forecast has been "terrible", Blanchflower argued.

     "Why they keep doing it I have no idea, but that looks to be a big error

and the economy is growing much more slowly than people had thought," he said.

     In his view low productivity is a symptom of inequality in the workplace.

     "If there is an increase in profits and the managers are going to pay it to

themselves why should the workers help the managers?" Blanchflower said.

     The MPC's latest forecast in its May Inflation Report is, once again, for a

gradual increase in earnings growth. The four-quarter average weekly earnings

growth rate is seen at 3% in 2019, 3.5% in 2020 and 3.75% in 2021. The most

recent data showed growth of 3.1% in April, down from 3.3% in March.

     MPC member Gertjan Vlieghe, appearing at a National Institute of Economic

and Social Research event with Blanchflower, argued that current data do not

point to much labour market slack.

     "I have a lot of sympathy with the concept, as do many of my MPC

colleagues. Detailed analysis of underemployment is part of our regular

toolkit," Vlieghe said.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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