UK equilibrium rate of unemployment may lie well below 4.5%

There is no revival in pay growth on the horizon, contrary to expectations from other economists, including those on the Monetary Policy Committee, Oxford Economics said.

According to Martin Beck, Oxford's lead UK economist, structural changes in Britain's jobs market mean that the so-called 'equilibrium' rate of unemployment may well lie much lower.

The Bank of England continued to believe that rate lay around 4.5% but real average weekly wages in Britain below the level of 10 years ago - despite joblessness at near 40-year lows and employment at record highs - pointed lower, he said.

Indeed, wage growth in both nominal and real terms had been on a downwards trend over the past 30 years, with each successive recession pushing it lower.

Beck said the responsiveness of pay to lower unemployment had been eroded by a shift towards less secure employment, tighter eligibility for benefits and globalisation.

The latter, Beck said, meant workers were now more compliant and both less willing and able to push for higher wages.

So with forecasts for unemployment to bottom-out at then current levels, the chances of a revival in pay growth were slim.

The solution to the above, of course, was for the economy to operate at "significantly higher pressure" with unemployment substantially lower, Beck said.

Barring that, Beck forecast annual wage growth would be capped at no more than 3.0% per year for the rest of the current decade.

"But this would require a recognition of, and a more accommodative policy response to, the historically weak economic expansion since the financial crisis. Neither seems likely.

"The predicament facing pay is the same as that facing the economy as a whole – how to restore what history suggests should be readily-attainable rates of progress in a world where policymakers’ pessimism errs towards accepting that this is as good as it gets."