In common with other forecasters, the MPC has consistently been surprised by the weakness of wages, given the strong cyclical bounce in job creation. It has over-predicted the path of wages in recent years (Chart 29). There are a number of possible explanations for this wage weakness. One is that there is simply greater labour market slack in the economy than we have estimated. Another is that the narrowing of slack is having less impact on wage pressures than in the past – the slope of the so-called Phillips curve is flatter. There is international evidence of the Phillips curve having flattened over recent decades (IMF (2006, 2013), BIS (2014)). That might arise because technology has made it easier and cheaper than ever before to substitute labour for capital, man for machine. That is the very essence of the Second Machine Age hypothesis. It would manifest itself in weaker than expected wage growth and a secular fall in the labour share of income, both of which we have seen in a number of countries. The central projection in the November Inflation Report assumes the labour share reverts over time to its historical mean, with the fruits of productivity harvested by labour and capital in line with their historical shares. And because wages have lagged behind productivity for several years, this implies the labour share is currently at a cyclical low, but would be expected to mean-revert in the period ahead.

Chart 27: Distribution of occupational employment in the UK by probability of automation Employment 8,000,000  Elementary Occupations Medium 28%  Low 37%  7,000,000  Process, Plant and Machine Operatives  High 35%  Sales and Customer Service Occupations  6,000,000  Caring, Leisure and Other Service Occupations  5,000,000  Skilled Trades Occupations  4,000,000  Administrative and Secretarial Occupations  3,000,000 2,000,000  Associate Professional and Technical Occupations  1,000,000 0  Professional Occupations 0.1  0.2  0.3  0.4  0.5  0.6  Probability of automisation  0.7  0.8  0.9  1  Managers, Directors and Senior Officials  Source: Frey and Osborne (2013); Bank calculations Notes: This chart shows the probability of automation based on estimates in Frey and Osborne (2013) matched against UK occupations  26  BIS central bankers’ speeches  Chart 28: Average probability of automation by occupation  Average probability of automation across population  90 80 70 60 50 40 30 20 10 0  Managers, Professional Associate Skilled Trades Process, Administrative Caring, Elementary Sales and Directors and Occupations Professional Occupations Plant and and Leisure and Occupations Customer Senior and Technical Machine Secretarial Other Service Service Officials Occupations Operatives Occupations Occupations Occupations Decreasing median pay  Source: ONS; Frey and Osborne (2013); Bank calculation Notes: This chart shows the estimated average probability of automation across occupations using the probabilities in Frey and Osborne (2013) weighted by UK employment  Chart 30: Inflation Report projections of nominal wages Nov. 2008 Nov. 2010 Nov. 2012 Nov. 2014 Data  Nov. 2009 Nov. 2011 Nov. 2013 Nov. 2015  Per cent change on a year earlier  Chart 31: November 2015 Inflation Report productivity and real wages projections and alternative scenario forecast Productivity (heads) Real wages Real wages (scenario)  8  Index: 2006=100 110  6  108  4  106  2  104  0  102  -2  100  -4 2004  2007  2010  2013  Source: Bank of England Inflation Report projections  BIS central bankers’ speeches  2016  98  -6 2006Q1  2008Q3  2011Q1  2013Q3  2016Q1  96 2018Q3  Source: ONS; Bank calculations  27  Chart 32: November 2015 Inflation Report labour share projection and alternative scenario  Chart 33: November 2015 Inflation Report inflation projection and alternative scenario  Labour share Per cent  Labour share (scenario)  % change oya  CPI Inflation  6  CPI Inflation (scenario)  59 58  5  57  4  56 55  3  54  2  53 52  1  51  0  50 2000Q1  2003Q4  2007Q3  Source: ONS; Bank calculations  28  2011Q2  2015Q1  49 2018Q4  2000Q1  2003Q4  2007Q3  2011Q2  2015Q1  -1 2018Q4  Source: ONS; Bank calculations  BIS central bankers’ speeches