The anomaly of unemployment falling at a much faster pace than wages rise will soon end, heralding a period of extended pay increases in the UK, according to Bank of England chief economist Andy Haldane.
Speaking at the Future of Work Conference in London on Wednesday (10 October), Mr Haldane said the lack of real wage growth in the economy in recent years has been a persistent puzzle to the Bank of England.
He said in the immediate aftermath of a financial crisis wage growth is muted because there is a larger number of unemployed workers, so employers do not need to offer good wages.
Mr Haldane said this is a cyclical trend that evaporates as the economy improves, yet such an evaporation hasn't happened in the UK.
He said the three factors that determine wage growth are employment levels, productivity levels, and bargaining power.
In recent months he said there are "compelling" signs that that wages are rising, with many public sector workers receiving pay increases of 3 per cent, and private sector pay also rising as unemployment has fallen.
A key driver of private sector pay increases of late has been that workers are now moving jobs on a more consistent basis, he added.
Mr Haldane said workers in jobs in the immediate aftermath of the financial crisis tended to stick with the employer they had, whether a pay increase they deemed satisfactory was forthcoming or not.
But Mr Haldane said more recently, the proportion of workers moving job, presumably with a pay rise attached, along with increases in public sector wages, should create a 'new dawn' for wage growth in the UK.
Higher wages would be expected to lead to greater inflation, and would be expected to cause the Bank of England to put the base rate up.
The challenge policymakers face in that environment is to avoid putting rates up too high and causing unemployment to increase.
Mr Haldane has previously told the Treasury select committee it is always better for the economy for interest rates to rise earlier, even if it slows economic growth, than to wait too long to put rates up, and potentially cause a much steeper recession.