So it was an apology of sorts, but with a sting in the tail: Bank of England policymakers don’t like to say sorry. It was in this vein that Ian McCafferty – a former chief economist for the CBI, who joined the Bank’s nine-strong monetary policy committee (MPC) in the autumn of 2012 – said he had twice made the mistake of calling for higher interest rates.
In each case, his reasoning was that wages were about to take off and would push up prices. The first time was in August 2014, when he was joined by fellow MPC member Martin Weale. Then he did it on his own, between August last year and January, before finally abandoning his campaign.
But while he was wrong on the first two occasions, he said, he would be right next time, and the coming upturn in wages would be the signal for an explosion. Central bankers have only one hammer with which to bash inflation, and it comes in the form of higher interest rates. He would be ready and waiting, trusty mallet in hand.
The reason behind his concern is that low unemployment must be forcing employers to pay their staff more – not just to attract the best talent, but to retain those in less-skilled roles.
McCafferty is relying on the economic equation behind the Phillips curve, which demonstrates an inverse relationship between wage inflation and unemployment. The lower unemployment falls, the higher the wages that must be paid – and therefore the higher the interest rates needed to dampen demand and prevent price rises getting out of control. Yet the UK has low unemployment and very little pressure on wages or prices.
So the next stage in the McCafferty argument is to show that low inflation is a global phenomenon and as soon as oil prices shift to more normal levels and a glut of food finds an equilibrium, there will be pressure in Britain for higher wages. That’s because workers will supposedly demand a 4% wage rise to give them a better standard of living when inflation heads back towards the Bank’s 2% target.
But like so many mainstream economists, he just doesn’t seem to get out much. A look at the UK economy through the lens of agents employed by the Bank of England to monitor investment, prices and employment shows declines dating back to early 2014.
Operating from regional offices, these agents regularly interview businesses and rank employers according to their intentions to invest and hire more people. In the manufacturing sector, hiring intentions are negative. Is that evidence of a surge in workers’ power and a steaming geyser of wages growth? It doesn’t look that way. Even from inside Threadneedle Street.
Then there is the seismic shift in Britain’s employment practices, with self-employment, zero-hours and short-term contracts, and flexible shift patterns that suit some but hit the livelihoods of many, especially the young.
In one recent example, cleaners at the headquarters of Nationwide building society in Swindon were told they had to work shorter shifts that started earlier, and work more unsocial hours. The changes, they calculated, would leave them up to £40 a week worse off.
The GMB union, representing the cleaners, approached their employer, building services company Carillion. Initially, the approach was rebuffed, but Nationwide subscribes to the living wage, which is £8.25 an hour outside London, rather than the £7.20 minimum wage for over-25s. For the company to keep its ethical badge, this must also be followed by its suppliers and subcontractors. After the threat of strike action and interest from newspapers, including this one, Carillion said the changes were its own idea and would not now be implemented.
The point here is that most employers are under pressure to cut costs, and workers remain in a weak position. Would Carillion have contemplated such a move in a strong labour market? You might say the workers’ power was demonstrated by the employer’s complete climbdown – if it wasn’t that the dispute has been rumbling on since last August and ended only when it became embarrassing.
Most workers in the private sector have no recourse to a recognised union. They have to fight their own corner. And all the evidence is they are not faring very well.
The international picture reinforces this view. Central banks remain convinced that they must keep credit cheap to oil the wheels of commerce. Without it trade would grind to a halt.
Economists often look at construction, because the commitment to invest in infrastructure and buildings is a sign of confidence. But Caterpillar, the US construction equipment giant, said in its forecast for 2016 that governments and private investors across the globe were cutting back on road, rail and marine investment.
David Blanchflower, a former MPC member who now teaches at the US’s Dartmouth College, and Stephen Machin, economist at University College London, both say wage growth is nearer 1.2% and falling. “It is becoming increasingly difficult to envisage an end to this coming soon, in the current economic climate where nominal wage growth remains weak and only very modest real wage growth has come about because of inflation falling below its 2% target,” they said.
Higher prices will not bring higher wages. The world has changed. The Phillips curve is broken. McCafferty must wait much longer before he considers raising rates.
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