unemployment, might be relatively modest. econometric estimates confirm that impression. replacing the unemployment gap with a measure of the under - employment gap produces a very similar wage equation ( table 1 ). and in a pairwise comparison, under - employment is statistically insignificant if the unemployment gap is included. under - employment is important for pay, but does not appear to much improve the explanation of recent wage dynamics. a third factor determining pay pressures is productivity. it is through gains in productivity that individual firms, and the economy at large, can finance increases in workers ’ pay. econometric estimates confirm that intuition. the productivity of the labour force is a ( statistically and economically ) significant determinant of pay ( table 1 ). on average across firms, a 1 percentage point rise in productivity raises aggregate wage growth by around 0. 8 percentage points. espinosa - vega and russell ( 1997 ) provide a history and review of the nairu concept. for example, bell & blanchflower ( 2018 ). specifically, the involuntary part - time share of employment. all speeches are available online at www. bankofengland. co. uk / speeches productivity growth in the uk has consistently surprised to the downside since the crisis, averaging 0. 5 % per year since 2010 or around 1. 5 percentage points below its historical average. we would expect weak productivity in turn to have been reflected in lower pay growth. consistent with that, the fall in productivity growth since the crisis largely explains the ( second ) downward shift in the phillips curve ( charts 6 and 7 ). since 2012, the bank ’ s forecasts have consistently over - estimated productivity growth, on average by just under 1 percentage point per year ( chart 10 ). this suggests a sizable fraction of the bank ’ s negative forecast errors for wages might plausibly be explained by downside surprises to productivity, alongside the effects of a lower than expected nairu. had the bank known a decade ago how weak uk productivity growth ( and how much lower the nairu ) was likely to be, its forecast errors for wages would have been smaller. we can confirm this by re - running our pay equations substituting in the actual outcomes for inflation, the unemployment gap and productivity growth, in place of the forecasts for these variables at the time ( chart 11 ). the fitted values for wage growth now track actual wage growth reasonably closely. with perfect foresight about its determinants ( productivity, unemployment and the nairu

swings. credit, in particular, has played an increasing role in asset price fluctuations. initially observed during the “ speculative bubbles ” of the 1980s and early 1990s, this trend has persisted. another example is provided by boom - bust cycles in asset prices and credit activities, which have often been associated with sharp economic contractions. in sum, the recent period has experienced some amplification of financial cycles, compared with business cycles. b. what are the factors underlying this possible amplification of financial cycles? let us first consider credit cycles : • the first factor in play is the behaviour of banks, which is closely linked to their environment. some of them may have tended to artificially increase their return on equity through higher leverage or low provisioning during upswings. as a consequence they tend to become more fragile in the downward phase of the cycle. in parallel, investors have become more reluctant to invest in the banking sector when profit expectations are low, making it difficult for banks to raise new funds. banks ’ soundness therefore tends to be more correlated to economic fluctuations than in the past, contributing to the amplification of the credit cycle. • accounting regulations so far may also contribute to amplifying credit cycles to some extent. in most financial centres, current provisioning behaviour does not allow banks to take a forward - looking view of their risks, as accounting and tax rules only accept loan - loss provisions for impaired loans. such a regulatory environment may amplify the credit cycle, contributing to low provisioning and over - lending during upswings and paving the way to sharp corrections during downswings. using full fair value accounting for loan portfolios might further amplify credit cycles by increasing the volatility of banks ’ earnings. • prudential rules may also have been unable so far to always prevent these developments. current capital adequacy rules are not risk - sensitive ; as a result, credit deterioration does not require additional regulatory capital unless loan losses erode the capital base under minimum requirements. as most banks – particularly large ones – have capital far beyond the prudential minimum requirements, they can bear a reduction of their capital base without being compelled to restrict their credit granting. therefore, capital ratio is not pro - cyclical as such. the point is that, even while capital requirements are fulfilled, losses can reduce banks ’ own funds at a time when capital issuance is difficult or costly ; in such a juncture, some analysts argue that banks may be