How do firms response to falls in demand for their products in the real world? Do they cut wages? Or are they able only to freeze them? What other methods can they use to adjust their labour costs? And does any of this matter? The answer to the final question is emphatically yes. How firms adjust the quantity and cost of their labour input, particularly in response to a downturn, is relevant for monetary policy. If firms are unable to cut wages – what economists call ‘downward nominal wage rigidity’ (DNWR) – then they have to reduce the number of employees, increasing unemployment, further depressing output and weighing on inflation.
Continue reading “How do firms adjust to falls in demand?”
Simon Caunt, David England and Imogen Shepherd.
AWE growth has picked up over the past year but stalled in recent months, remaining some way below pre-recession levels. Should we expect that weakness to continue? One way to gauge wage pressures is through the company visit scores (CVS) the Bank’s Agents assign for businesses they meet. Agents score a range of variables, including turnover, employment and costs, -5 to +5, generally according to growth. An anonymised CVS dataset is published on the Bank’s website. Here we look at what CVS say about prospects for pay, considering factors such as recruitment difficulties, low inflation, public sector pay and the National Living Wage. Overall, we think this evidence points to continued modest rates of wage growth over the coming year.
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Pay and productivity growth over the past couple of years have remained weak despite a rapid fall in unemployment and robust GDP growth. But these aggregate measures in the UK reflect the sum of a diverse range of individuals in the workforce. Changes in the mix of that workforce, therefore, can affect pay and productivity growth. Based on analysis of the determinants of individual workers’ wages, I estimate that changes in the mix of the workforce may account for about 1pp of the recent weakness in annual average pay growth relative to normal. Continue reading “Skills matter: The changing workforce and the effects on pay and productivity”