UK's weak pay growth tied to Brexit uncertainty

21 November 2017

The UK's weak pay growth may be due Brexit uncertainty, making workers rein in their demands according to a senior Bank of England official.

Dave Ramsden, one of the Bank's deputy governors, who was making his first speech after joining the Bank from the Treasury, said the impact of the EU referendum on inflation had persuaded him to vote against an increase in interest rates earlier this month.

According to Ramsden, workers were showing pay restraint and unemployment had continued to fall and currently stood at a 42-year low of 4.3 per cent.

The decade since the financial crisis hit the global economy was marked by historically weak growth in earnings, but Ramsden said it was possible that ''since the referendum, workers have responded to uncertainties about the outlook by showing even more flexibility in their wage demands''.

He told an audience at King's College, London, ''At the margin, the idea that workers are responding to Brexit by showing increased flexibility could mean that is more room than headline measures of slack suggest for the economy to grow without generating above-target inflation in the medium term.

''For that reason, in our November meeting I was willing to wait for more evidence on the evolution of wage and domestic cost growth before beginning to withdraw some monetary stimulus. So I voted for no change in bank rate.''

''People's willingness to accept lower real wages would encourage firms to hoard labour, and shift away from capital expenditure for more labour input for a given unit of output,'' he said, as he explained why unemployment has fallen sharply and pay growth has stayed low even as companies have put off making big investments.

According to commentators, traditionally, economists would have expected wage growth to pick up with unemployment down at 4.3 per cent, a 42-year low.

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