- enter employment. once those temporary factors have dissipated, the equilibrium rate will tend back towards the natural rate of unemployment – the level to which unemployment would return eventually when supply and demand for labour are in balance in the long run. all speeches are available online at www. bankofengland. co. uk / speeches under - measurement of labour market slack a straightforward explanation of why pay growth is subdued at very low levels of unemployment is that we are under - measuring the amount of spare capacity – or ‘ slack ’ – in the labour market. recent trends in the world of work have meant greater ( voluntary and involuntary ) self - employment and part - time employment. measures incorporating under - employment as well as unemployment – i. e. how much more people who are in work would like to work – may give a better indication of the amount of spare capacity in the labour market. in such a world, low pay is simply telling the policy maker that there is more labour market slack than the unemployment indicators are registering, that the output gap is larger than thought and that the economy can grow at a faster rate without generating domestic inflation pressure. i am reasonably sure that the under - measurement of labour resource utilisation accounts for some of our failure to forecast pay growth more accurately in the early years of the recovery. but i am less convinced it is now the main driver. the underemployment rate, which measures the fraction of the workforce that want to work more hours, still remains more than half of a percentage point above its pre - recession level in 2007. however, although some potential adjustment could possibly remain, we have nevertheless seen a substantial unwinding of spare capacity even in these broader indicators of underemployment. the curve has shifted downward the phillips curve traces the relationship between pay growth on the one hand and the balance of labour market supply and demand, represented by unemployment, on the other. the same shape of curve can be drawn at lower or higher levels of pay growth and unemployment. a shift up or down in the level of the curve does not affect the coefficient of the relationship between pay and unemployment. but any given level of unemployment will generate a higher or lower rate of growth of pay. there are a number of very different reasons why the phillips curve may have shifted downwards so that current very low levels of unemployment are generating very weak upward pressure on pay. these include a lower natural rate of unemployment, lower or more anchored inflation expectations and changes in expectations of real pay

of credit growth followed by periods of contraction. the growth of credit in an economy tends to build up and accelerate over time and then contract as optimism about the future income streams and asset values waxes and wanes. and there are mechanisms, such as collateral values, endogenous to the creation of credit that reinforce both the upswing and the downswing. much of achieving financial stability is about good regulation of banks – ensuring they have enough capital and liquidity to withstand stress in the market or economy, and ensuring that they aren ’ t running risks that will amplify a downturn, for example through weak underwriting standards or opaque structures. jorda et al ( 2015 ) demonstrate that asset price bubbles fuelled by credit booms increase financial crisis risks the most. creditfinanced housing price bubbles are shown to present a particular risk. in contrast, equity price bubbles – particularly those unaccompanied by rapid credit growth – are typically less damaging and there have been numerous equity price bubbles that did not turn into financial crisis episodes. all speeches are available online at www. bankofengland. co. uk / news / speeches for non - bank financial firms, our focus has been more on their potential to impact others in the market – how under stress they can affect liquidity and pricing in the market, which can affect the financial system more generally. market - based finance has grown rapidly and brings a welcome diversity to the sources of funding available to the real economy. but the structure of some investment funds – investing in assets with poor underlying liquidity in stress while at the same time offering daily redemption to investors – introduces liquidity risk. if many investors want to redeem within a short period, markets may not be able to absorb the necessary asset sales. we have seen some idiosyncratic instances of such a dynamic in the uk – with funds having to gate investors as a result. these have not given rise to financial stability risks. but if we saw this happen on a wider front, if for example investors lost confidence in a less liquid asset class, there is a risk of redemption pressures that could not easily be met and consequently contagion and firesales that could damage the financial system. these are international markets so we need to work internationally to assess these risks and any structural remedies that might be warranted. risks to financial stability don ’ t all arise in the financial system, however. there is a borrower for every lender. over - ind