Second, participation rates within the labour force have increased significantly, both prior to the crisis and over the past couple of years, especially among women and older age cohorts. This reflects a range of factors including the abolition of the default retirement age, concerns about the adequacy of pension and saving income and changes to the benefits regime. Third, levels of immigration have increased significantly over the past 20 years, boosting labour supply. There is an active debate on its effects on the wage distribution. For example, Dustmann et al (2013) find that each 1% increase in the share of migrants in the working age population leads to a 0.6% decline in the wages of the 5% lowest-paid workers. Several studies report similar results (Migration Advisory Committee (2012)). At a headline level, these polarising patterns are also clear in aggregate wage data. According to contacts of the Bank’s Agents, staff shortages are rising in highly-skilled professions such as IT, engineering and construction. Furthermore, the Recruitment & Employment Confederation (REC) survey suggests that the annual rate of wage inflation for new hires is now above 4% (Chart 19). But measures of economy-wide average weekly earnings (AWE) paint an altogether different picture. Annual rates of wage inflation are currently around 0.7%, below the rate of inflation. Put differently, the jaws between the wage growth of the highly-skilled and the rest of the economy are wide and have widened.

The rotation from net asset purchases towards our conventional monetary policy instruments, together with our stock of assets and the related reinvestment policy, ensure an ample degree of monetary policy accommodation. In particular, our enhanced rate forward guidance provides a strong anchor for policy rate expectations. And the reinvestment policy will ensure that the favourable liquidity conditions and duration extraction associated with the large stock of assets on our balance sheet remain in place for a long period and thereby exert downward pressures on term premia. The mechanisms underlying the combination of instruments are duration extraction, liquidity creation and expectation management. Starting with duration extraction, our reinvestment policy implies that the bonds we have purchased will remain on our balance sheet for an extended period of time after the end of net purchases. Asset purchases affect interest rates mainly through the market price of duration risk, which is the interest rate risk borne by price-sensitive investors holding long-term bonds. If the central bank wants to exert downward pressures on long-term interest rates, then it can absorb duration risk from the market by purchasing securities with a relatively longer maturity. This frees up more risk-bearing capacity for investors, which they can re-allocate towards other types of risk, including investment in productive capacity. For a central bank to set this mechanism in motion, it needs to hold a large portfolio of long-dated securities embodying duration risk. Chart 5 shows that we have built a sizeable portfolio estimated at around 20% of the duration-equivalent stock of public debt.