MNI INTERVIEW: UK Labour Market Still Tight - NIESR's Millard

Bank of England officials who dissented against August’s rate cut were right to argue that more evidence is needed of easing wage pressures, deputy director of the National Institute of Economic and Social Research and former senior BOE official Stephen Millard told MNI.

Four of the nine Monetary Policy Committee members voted against the 25-basis-point reduction in Bank Rate, while supporting evidence for the small majority backing a cut came from data in the BOE’s Monetary Policy Report showing the ratio of vacancies to unemployment falling below the estimated equilibrium level, suggesting emerging labour market slack.

Millard cautioned against placing too much weight on precise estimates of equilibrium in the vacancies to unemployment ratio, adding that wage growth on the latest reading was still strikingly high, at 5%.

"I'm yet to be convinced that the labour market is actually slack now, and, as a result, I'd be wary about any kind of prediction that says that wage growth is going to fall quickly,” he said in an interview. “If I was on the MPC ... I would want to see really strong evidence that wage growth was falling before I would cut." (See MNI INTERVIEW: Recent Inflation Shocks Restrict Policy - Monti)

The MPR also projected that four-quarter GDP growth would stay close to its recent average of around 1.25% in the first half of the three-year forecast, below the Bank's 1.5% trend growth estimate, but Millard noted that while NIESR has similar growth projections it sees trend at close to 1.25%.

JOBLESS OUTFLOWS HOLD UP

The MPC’s majority view of growing labour market slack came after BOE economists revised estimates of the equilibrium vacancies-to-unemployment ratio, addressing concerns raised by former MPC member Michael Saunders and others that the metric had become less useful as the near-zero cost of online advertising seems to have prompted firms to maintain ads for jobs even at times when they are less eager to hire.

As a result there now tend to more job ads at any given level of unemployment, with Bank analysis showing that the equilibrium vacancy-to-unemployment ratio has risen to around 0.6, from roughly 0.35 between 2000 and 2014.

But, while Millard accepts the general argument for a higher rate, he was sceptical that the new estimate of equilibrium has been precisely determined, and noted that today’s vacancies-to-unemployment ratio was higher than the average since 2009. If the 0.6 estimate were correct it would imply there has been labour market slack for the past decade, he said, adding that this was unlikely.

"The current unemployment outflow rate is higher than its average since 2000, so that goes along with our [view] ... that the labour market is still tight," he added.

"The question of whether you think there is slack in the labour market or not depends on whether you're prepared to believe the Bank's new equilibrium number, or whether you think that the vacancy unemployment ratio is going to go back to its average, and maybe the unemployment outflow rate is a better measure," Millard said, adding that more data is required to clarify the picture, as argued by the MPC dissenters.

"We'll only find out the answer over the next few months,” he said. “If there is slack in the labour market, then why is wage growth still running at 5%?"