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The lack of wage growth and the falling NAIRU

Published online by Cambridge University Press:  01 January 2020

David N.F. Bell  and
David G. Blanchflower
David N.F. Bell*
Affiliation:
Stirling Management School, University of Stirling, IZA and CPC
David G. Blanchflower*
Affiliation:
Dartmouth College, Stirling Management School, University of Stirling, IZA, Bloomberg and NBER
*
E-mail. [email protected]
E-mail. [email protected]
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Abstract

In this note, we argue that a considerable part of the explanation for the benign wage growth in the advanced world is the rise in underemployment. In the years after 2008 the unemployment rate understates labour market slack. Underemployment is more important than unemployment in explaining the weakness of wage growth in the UK. The Phillips curve in the UK has now to be rewritten into wage underemployment space. Underemployment now enters wage equations while the unemployment rate does not. There is every reason to believe that the NAIRU has fallen sharply since the Great Recession. In our view the NAIRU in the UK may well be nearer to 3 per cent, and even below it, than around 5 per cent, which other commentators including the MPC and the OBR believe.

Keywords

unemploymentunderemploymentwage inflationhoursJ31J42J22E31
Type
Notes and Contributions
Information
National Institute Economic Review , Volume 245 , August 2018 , pp. R40 - R55
Copyright
Copyright © 2018 National Institute of Economic and Social Research

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Footnotes

We thank Doug Staiger, Gertjan Vlieghe, Malhar Nabar and Andy Levin for helpful comments and suggestions.

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