65 age bracket that have increased their participation rate most – by just under 6 % since 2010 when the increase in the pension age started to be phased in. alongside this, changes to the incapacity benefits regime may well also have had the effect of bringing more workers into the market. the number of people under the age of 65 who are inactive because of incapacity is down by around 200, 000 since mid - 2008. for much of the post - war period, there has been in the uk a steady decline in the hours people have wanted to work. as income grew, the trend was to reduce hours and maintain income rather than to maintain hours and increase income. not surprisingly, the largest fall in real pay since records began has reversed that trend ; the evidence suggests that, as the economy has recovered, with lower real pay, many have sought to increase hours to maintain – or recover – income. that of course may well be a temporary effect and as and when real pay rises the pre - crisis trend may reassert itself. but it may be that this effect will last for some time yet. another explanation for the weakness of pay despite the fall in unemployment might be that the pressure to catch up lost income is much weaker post recession than it has been in the past. based on previous episodes in the uk, we might have expected a reduction in real incomes to result in increased inflationary pressure from the labour market. the big lesson from the 1970s was that weakness in real incomes and price movements, which drive a wedge between consumer prices and output prices, lead to pressure for increases in pay to “ catch up ” on the lost income : or as it is sometimes called “ real wage resistance ”. the end result is more inflationary pressure for a given amount of unemployment. put differently, to keep a lid on inflation, unemployment has to be higher following periods of pressure on real incomes. the current reduction in real incomes has been as big as we ’ ve seen for nearly a century. real wages are still almost 9 % below their pre - crisis peak. that is a fall of around 20 % relative to the pre - crisis trend. following a year of strong growth and a very rapid fall in unemployment, this would suggest workers would now demand some catch up in pay. however, there appears to be little evidence of real wage resistance – the sharpness of the recession and the years of austerity that have followed it, appear to have caused a shift in the psychology of uk

did not come from growth in real incomes but from a large, two percentage point, drop in the savings rate. business investment still appeared to be dragging on activity. so there were real question marks about whether this strong growth could be sustained. the mpc took an optimistic view. we forecast business investment would increase as the surveys suggested and play a bigger role in supporting growth. we forecast also a return to productivity growth – a real casualty of the recession – that would drive higher pay and hence provide a more sustainable base for consumer spending. and, as a corollary of higher productivity we thought the growth in output would be accompanied by a slower fall in unemployment. so overall, our expectation at the time i joined was that the recovery would broaden out in 2014. but over the year the boost from pent up demand would fade and as a result growth would begin to fall back from very strong rates to a pace around its historic averages. three other mpc judgments from my first meeting and inflation report are also worth recalling. bis central bankers ’ speeches first, we did not think the uk economy would get much help from the rest of the world. a combination of relatively weak growth in the parts of the word that mattered most for uk exports, particularly the euro area, and the disappointing performance of uk exports in recent years led us to believe that the uk ’ s net trade would not provide a material contribution to growth. second, while we expected productivity growth to pick up in 2014 we did not forecast that the uk would recover any of the very substantial amount of productivity growth, 14 % relative to the pre - crisis trend, that had been “ lost ” in the five years since the crisis. this so called “ productivity puzzle ” – why the uk ’ s productivity had fallen so far and had not recovered – was a major part of the uncertainty the committee faced about how fast the uk could grow without generating inflation pressure. if some or all of that lost productivity growth could be recovered, the economy could grow faster and for longer without putting the inflation target in jeopardy. but looking forward the committee took a cautious view and based its view of the future on the expectation that productivity growth would recover only slowly and that none of the “ lost ” productivity would be recovered. third, the mpc was operating under the “ forward guidance ” it had agreed in august last year and to which i had subscribed on joining the committee. the underlying concern behind forward guidance was that the market might react too quickly