But what is different is that many of the channels which were important in detracting from our supply capacity then don’t seem to be operating particularly strongly today. In particular, the scourge of long-term unemployment and of discouraged job seekers leaving the labour market that typified the malaise of the early 90s has been in far less evidence in this downturn. The rate at which the long-term unemployed are able to move back into employment has remained around its historical average (Chart 2). And labour market participation has held up pretty well (Chart 3). Likewise, the surge in corporate insolvencies and associated increase in capital scrapping seen in the early 90s has not been repeated (Chart 4). If demand deficiency is weighing on the supply side of our economy, it’s doing so via different channels than in the past. But that is not to deny that it may be happening. There are a number of other mechanisms through which persistent demand weakness may be eating away at the effective supply capacity of our economy. Indeed, many of you may have experienced these firsthand. The need to retain core skills and maintain minimum staffing levels means that as demand falls some companies – especially smaller companies – have not been able to reduce their workforces by a corresponding amount. Others choose to hold on to experienced workers, even if currently underutilised, for fear of losing valuable experience and knowhow.

BIS central bankers’ speeches  7  References Broadbent, Ben (2012), “Productivity and the allocation of resources”, speech given at Durham Business School, available at: http://www.bankofengland.co.uk/publications/Pages/speeches/2012/599.aspx Cairncross, Sir Alexander and Cairncross, Frances (1992): “The Legacy of the golden age: the 1960s and their economic consequences” (Routledge) Chancellor of the Exchequer (2012): Letter to the Governor of the Bank of England, reaffirming the remit of the MPC, available at: http://www.hmtreasury.gov.uk/d/open_letter_from_chx_to_boe_22032011.pdf Furceri, D and Mouragane, A (2009), “The effect of financial crises on potential output: new empirical evidence from OECD countries”. OECD Economics Department Working Papers no. 699. George, Lord Edward (1999): “Annual Cornwall Lecture”, available at: www.bankofengland.co.uk/publications/Pages/.../1999/speech62.aspx King, Sir Mervyn (1997), “Inflation targeting 5 years on”, speech given at the London School of Economics, available at: www.bankofengland.co.uk/publications/speeches/1997/speech09.pdf King, Sir Mervyn (1997), “Changes in UK monetary policy: Rules and discretion in practice”, Journal of Monetary Economics, Volume 39, Issue 1 (p81–97) King, Sir Mervyn (2004), “The institutions of monetary policy: the Ely Lecture 2004”, available at: http://www.bankofengland.co.uk/publications/Pages/speeches/2004/208.aspx King, Sir Mervyn (2012), remarks given at the Panel discussion on “Challenges for the Future”, Federal Reserve Board Conference “Central Banking: Before, During and After the Crisis”, available at: http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech556.pdf International Monetary Fund (2009), “What is the damage? Medium term output dynamics after financial crises”, World Economic Outlook, October, chapter 4, pages 121–151.