BOE’s Weale Sees U.K. Cost Pressures From Labor-Market Changesby
Research shows shorter working week, reflecting social change
Labor-market structure has implications for monetary policy
Bank of England official Martin Weale said a reduction in working hours will add to cost pressures in the U.K. and may require a policy response to head off inflation.
In a detailed analysis of the labor market published Thursday, Weale said structural changes including longer time spent in education, an aging population, better representation of women in the workforce and growing incomes have enabled people to raise living standards while working fewer hours. A shorter working week could potentially push up unit-wage costs, he said.
“The outlook for costs themselves is tighter than it seems just on the basis of average wages,” Weale said in a speech that he delivered in Crawley, south of London on Wednesday. “The shortening of the average working week is likely to push up on costs in a material way. In the near term, the continued shrinking of the working week may have implications for monetary policy.”
The BOE’s Monetary Policy Committee has put the labor market at the heart its debate over when to raise interest rates from a record-low 0.5 percent. Governor Mark Carney signaled on Tuesday that an increase is still some way off as he highlighted global risks to the outlook and said recent pay data suggests there is enough slack to justify loose policy.
While Weale and Carney voted with the eight-strong majority to keep the BOE benchmark unchanged this month, Weale’s comments suggest he is closer to voting for a rate increase than the governor. Still, he said inflation, which was 0.2 percent in December, needs a boost from wages to reach the BOE’s 2 percent target.
“Whatever the causes of the recent weakness, inflation is unlikely to recover back to target without a marked improvement in wage growth. This is particularly true given the backdrop of further recent falls in the oil price,” Weale said. “The general tightening in the labor market, as indicated by the continued fall in the unemployment rate, means that this is likely to happen, in my view.”
A shorter working week means -- in the absence of productivity gains -- firms will produce less output, he said.
“As a result, unit wage costs -– which measure the average wage per unit of output -– will be higher than they would otherwise be,” Weale said. “For me, unit-wage costs are the most important indicator of domestic costs: sustained growth in these at more than 2 percent per year is not consistent with the inflation target, unless other costs –- of raw materials and imports -– are growing more slowly than this, as they are at the moment.”
In his study, Weale used three models to examine changes in the composition of the labor market. While they differ in degree, all three “point to the conclusion that the working week is likely to shorten further,” he said.
“The world of work is changing” and this has potential monetary-policy implications, Weale said. “I will continue to monitor this alongside any other surprises that the economy may throw up.”