the labour market, based on the costs of job search, also predict a negative relationship between trend productivity growth and the natural rate of unemployment. in that setting, in which employers trade off the cost of search against the prospective surplus from a new job, lower expected growth in productivity reduces the present value of that surplus and lowers the rate of job creation. the canonical description of this “ capitalisation ” effect is due to pissarides ( 2000 ). bis central bankers ’ speeches the ons ’ s monthly labour market release publishes standard summary statistics about the duration of unemployment and the reasons for inactivity. but, at least since 1994, the lfs has also included a host of questions about the characteristics of employees and their jobs. these are listed in table 1. some are easy enough to answer – your age, where in the country you work and long you ’ ve been in your job. others, those related to respondents ’ qualifications, or the sector they work in, offer a long list of potential answers. there are over eighty sectors from which to choose, hundreds of detailed occupational descriptions. table 1 people are also asked about their pay. and, unsurprisingly, there are clear correlations between wages and characteristics. pay is higher in some sectors and occupations than others ; it ’ s also higher, at the level of the individual, for people who have better qualifications and more experience, in terms both of age and job tenure. overall, if you take the post - 1994 sample as a whole, the spread of individuals ’ characteristics statistically explains around one half of the variation in their pay. this distribution can also change over time. individuals ’ characteristics can evolve – people become more experienced, in principle they can also switch occupations or become better educated. the distribution will also shift if there are differences between the characteristics of those entering and leaving employment. we ’ ve already seen how large those gross flows can be. so even a relatively modest contrast between the two groups can lead to significant changes at the aggregate level. the compositional effects, which are simply the fitted values of a regression of pay on characteristics, attempt to track the effects of these shifts from one quarter to the next. in aggregate, the estimated effects amount to a “ hedonic ” adjustment for labour quality. chart 7, summarising the results, is a version of a graph we published in the last two inflation reports. note that, over time, the effects have tended to be positive. the average

philipp hildebrand : principles for sound compensation practices summary of a speech by mr philipp hildebrand, vice - chairman of the governing board of the swiss national bank, at the economic outlook 2009 ( unternehmer nw - schweiz ), basel, 23 april 2009. the complete speech can be found in german on the swiss national banka€™s website ( www. snb. ch ). * * * most financial institutions viewed compensation systems as being largely unrelated to risk management and risk governance prior to the crisis. short - term profits were rewarded with generous bonuses with little regard to the longer - term risks taken on behalf of the firm to generate those profits. with hindsight, it should therefore be no surprise that these bonuses fueled the excessive risk - taking that has ultimately undermined the global financial system. it is important for the future stability of our financial system that compensation systems be viewed as an integral part of the risk management system in financial firms, and designed and governed with this in mind. the financial stability board ( previously the financial stability forum ) has drafted a set of sound compensation principles for large financial institutions with exactly this goal in mind. the principles were endorsed by the g20 leaders at the london summit earlier this month and aim to be widely implemented by the 2009 remuneration round.