Labour hoarding since the pandemic has helped fuel inflation and will make it very difficult for policymakers to know when it is appropriate to cut interest rates, a Bank of England policymaker said today.
Megan Greene, an external member on the Bank’s Monetary Policy Committee (MPC), said “excess labour hoarding may have contributed to labour market tightness and thus wage growth, even as economic activity has softened”.
Labour hoarding is when firms do not adjust employment in line with short-term changes in demand. Firms may hang on to workers in the face of subdued demand or decrease the average hours worked per head.
She said the practice formed part of the explanation to two “puzzles” facing policymakers when looking at the labour market.
The first is that unemployment remains low even though growth is subdued. The second is that wage growth remains elevated and “partially unexplained”.
“If excess labour hoarding persists, this could mean employment and wage growth remain resilient despite our restrictive policy stance and inflation takes longer to converge to target,” she said in at an event hosted by Make UK.
However, Greene also noted that labour hoarding could pose risks on the other side too.
“There is a risk that firms could suddenly give up labour hoarding if activity failed to recover…If this happened, unemployment could rise much more steeply than we are expecting,” she said.
To assess which outcome is more likely, Greene said she would focus carefully on the ordinary indicators of labour market slack as well as the extent to which higher costs were being passed through to consumers.
“Firm pass through will play a key role in determining how much excess labour hoarding there is,” she said.
Greene, who is among the MPC’s more hawkish members, appeared to suggest that she would consider cutting interest rates soon depending on the data, but still wanted more evidence that persistent pressures were easing.
“Data released ahead of our next meeting will give a clearer indication of how far along the ‘last mile’ we have come…In considering for how long we must retain our restrictive stance before policy should be eased, I think the burden of proof therefore needs to lie in inflation persistence continuing to wane,” she said.
Markets expect the Bank of England to cut interest rates this summer, but traders are split between whether they expect cuts to begin in June or August.