mr king explores lessons from the uk labour market text of the employment policy institute ’ s fourth annual lecture delivered by the deputy governor of the bank of england, mr mervyn king, held in london on 1 / 12 / 98. it is both an honour and a challenge to deliver the fourth epi lecture. it is an honour to follow in such distinguished footsteps, and it is a challenge to tackle the subject of the link between monetary policy and the labour market. few subjects are as emotive. wages, jobs and unemployment feature as frequently in the popular press as they do in academic articles. the bank of england must learn from one in order to convey our message in the other. and we are fortunate in that labour economics is a field in which british economists have been – and continue to be – at the forefront of research. that i can say objectively because i am not myself a labour economist. so tonight i shall be exploring lessons from the labour market for the monetary policy committee. the employment policy institute has played an important role in bringing together those undertaking research on labour markets and those involved with policy decisions. in particular, its employment audit provides a valuable commentary on current developments. the labour market is unlike any other market. indeed, for many people the very language of economists – equilibrium unemployment, market - clearing wages – seems incompatible with the human dimension of unemployment and deprivation. are the 16 million unemployed people in the european union merely an equilibrium, on the one hand, and a statistic, on the other? but for most people the labour market is the market where – for better or worse, in sickness or in health – they sell their time and their skills at a market price. that price determines, in large part, their opportunities and economic welfare. wage rates have a much greater significance in influencing the distribution of real incomes than do the prices of almost anything else. as a result, the labour market cannot be divorced from broader social and political considerations. if their terminology and language are sometimes insensitive, what do economists have to offer by way of ideas about unemployment? the prize for the most important idea and most insensitive terminology surely goes to milton friedman for the concept of the natural rate of unemployment. i shall discuss shortly the significance of this idea for monetary policy. but for a more elegant advocacy of a similar position it is necessary to delve further back in history. this month sees the 75th anniversary of the publication of what milton friedman described as john maynard keynes ’ best

a floor for the minimum level of foreign exchange reserves a country is required to maintain ; ( ii ) the aim of resolution is to find a cooperative solution negotiated between a debtor and its creditors. no particular class of creditor should be in a privileged position, unless the instrument in question explicitly gives it preferred creditor status ; ( iii ) the use of temporary standstills – possibly sanctioned by the international community – would allow time for a country to negotiate with its creditors. in the absence of a formal mechanism to achieve this, the imf can indicate its endorsement of a standstill by being prepared to provide new money to a country which has temporarily suspended payments to its creditors ( often referred to as imf lending into arrears ). by making standstills part of the furniture – or one of the bricks – they would be seen not as an ad hoc response, which might lead to contagion in other emerging markets, but part of an approved process ; ( iv ) measures, including perhaps strictly temporary capital controls, to prevent capital flight by domestic residents in exceptional circumstances. it would be odd to sanction a standstill of payments to foreign creditors while allowing domestic residents to move assets overseas without restriction. the essence of the middle way is to find practical steps forward to enable emerging markets to better manage the liquidity positions of their external liabilities, and to reduce their dependence on debt finance. crises will still occur. but the aim is to reduce their frequency and severity. to that end there is one further policy which is fundamental to the success of the middle way – transparency. 5. transparency transparency is one of the most popular words in economic policy today. and for good reason. much has been said about transparency, and, interestingly, much has been done. why is transparency so important? in itself, transparency will neither prevent nor resolve financial crises. but transparency can help reduce the frequency of crises – by alerting not only markets but also policymakers to problems on the horizon – and their severity – by minimising the surprises about the scale of any liquidity problems. in korea, the foreign currency exposure of its banking system was not known until after the crisis had hit. and in thailand, the true state of the foreign exchange reserves was unknown even to its own finance ministry, let alone financial markets. so transparency can be seen as a “ second best ” policy when purist solutions to financial crises are unavailable. it is in the context of the middle way that transparency