UK monetary policy, earnings growth and labour market structure 1989-1998

The Bank of England’s Monetary Policy Committee (MPC) sets UK interest rates to control inflation paying particular attention to earnings growth as measured by the Average Earnings Index (AEI). In October 1998, a revised AEI indicated that wage inflation had been overestimated bringing the conduct of monetary policy into question. This index was given credence by the popular belief that structural change in the labour market has reduced the earnings growth rate. However, a further revised AEI in March 1999 suggested wage inflation had been underestimated. This paper investigates why labour market changes have not suppressed earnings growth, assessing the influence of structural factors on the AEI. A new series of occupation-weighted, earnings indices from Labour Force and New Earnings Surveys’ data is computed. The failure to adequately adjust for changes in UK labour market structure (in particular, increased service sector employment and greater female participation) is observed to have slightly underestimated earnings growth.