(Bloomberg) -- U.K. unemployment might have to drop as low as 3 percent, a rate not seen in at least half a century, before wage growth picks up any serious traction, according to research co-written by a former Bank of England policy maker.
The number of people seeking more working hours has jumped since the global financial crisis, while weaker bargaining power means employees are “frightened” to ask for higher pay, wrote David Blanchflower, who was on the BOE’s interest-rate panel from 2006 to 2009, and University of Stirling economics professor David Bell.
Unemployment is currently 4.3 percent, the lowest since at least 1975. But Blanchflower and Bell put the underemployment rate at 4.9 percent, and suggest a drop to 3 percent is necessary to boost wage growth back to pre-recession levels. They also flag low productivity as a reason for sluggish pay gains.
“Underemployment is more important than unemployment in explaining the weakness of wage growth in the U.K.,” the authors wrote. “The U.K. is a long way from full-employment.”
The lack of wage growth in Britain and other developed economies amid falling unemployment has baffled policy makers since the financial crisis. BOE officials have consistently been overly optimistic in forecasting a pay revival, prompting them to lower their estimate of the jobless rate needed to spur inflationary pressures to 4.25 percent.
Blanchflower and Bell also contend that the U.K. Phillips curve -- the inverse relationship between unemployment and inflation -- appears to have flattened sharply. While that chimes with findings of the Federal Reserve and others, it puts them at odds with BOE research published Friday that suggested the curve has rather fallen because of a better-educated labor force.
In a speech in Canada last week, BOE Governor Mark Carney referred to a decade of lost wage growth in the U.K., as pay increases failed to reclaim their pre-crisis levels of about 4 percent a year. That’s been felt more acutely in the past year because of the sterling-driven pickup in inflation.
There are some signs that real purchasing power is returning, with reports this week forecast to show wages rising faster than consumer prices for the first time in more than a year and surveys suggesting pay settlements are drifting higher. That pickup has convinced most officials that there is little slack left in the labor market, boosting speculation the BOE will hike interest rates again in May.
©2018 Bloomberg L.P.