MNI INTERVIEW:UK With Higher NAIRU More Prone To Wage Pressure

The Bank of England would look at moving its estimates for future wage growth higher if as is likely it includes an upward revision of its view of the level of joblessness compatible with stable inflation in its latest forecast round to be released after this week’s monetary policy meeting, the deputy director of the National Institute of Economic and Social Research told MNI.

A shift higher in the Bank’s view of the so-called non-accelerating inflation rate of unemployment, or NAIRU, could accompany a post-Covid labour market stock-take expected in Thursday’s February Monetary Policy Report, though Monetary Policy Committee members will have factored it into their own calculations for some time, said Stephen Millard, Deputy Director at the National Institute of Economic and Social Research and a former manager in the BOE's Monetary Analysis division.

"I suspect that the MPC all have a view of the NAIRU in their heads. which they have probably adjusted up faster than the official Bank of England position. So in that sense the Bank staff are adjusting towards where the MPC already are," Millard said in an interview. (See MNI POLICY: BOE Looks At Raising Equilibrium Jobless Estimate)

The BOE last revised its estimate of the NAIRU in November 2021, lowering to 4.25%.

"We would expect to see rising unemployment over the next year or so without that really bearing down on inflation or wages that much,” Millard said. “That suggests that maybe they have got it a little bit low and they are just doing a little bit of a rethink of where the long-run actually is.”

WAGES

A higher NAIRU would also mean that the UK was more prone to wage pressures at lower levels of unemployment, he said.

“The implication would be that where they might have previously had a forecast for wage growth of, say, 5%, they might nudge it up to 6%, 7%," he said.

A risk for policymakers will be that as headline inflation heads back down wage growth will stay elevated to catch up on the recent loss in real earnings.

"There is some equilibrium relationship here between the real wage and labour market tightness. To the extent that real wages are away from that equilibrium it is actually nominal wage inflation that brings them closer,” Millard said. “Maybe it is a case of we are going to see rates of wage inflation of 6-7% even when inflation is back down to target just so that real wages can catch back up.”

Nonetheless, Millard is sceptical about the usefulness of NAIRU, whose last adjustment followed an extended period of low pre-pandemic unemployment and subdued inflation.

"We saw the unemployment rate steadily falling without any kind of rise in wage pressure and so this caused everybody to revise down their estimate of the NAIRU ... but that is it is the horse driving the cart,” he said. I haven't used the unemployment gap to give me a forecast of wage inflation, I have taken outturns of wage inflation to dig out what I think the NAIRU must look like.”