December 2019 issue contents
Understanding the United Kingdom's Wageless Recovery

Benjamin D. Nelson
Rokos Capital Management LLP and Centre for Macroeconomics


The recovery of 2013 that followed the United Kingdom's Great Recession featured a rapid fall in unemployment but stagnant wage growth. Did the wage Phillips curve break down? These dynamics have two main candidate explanations: declining labor frictions, meaning lower unemployment without increasing wage growth; or a demand recovery accompanied by weak productivity, meaning unemployment fell but equilibrium wage growth remained low. This paper investigates using an estimated New Keynesian model featuring unemployment. The data favor a mix of explanations, but with the balance of evidence favoring the second. A demand recovery reduced unemployment, but wages are likely to have remained weak mainly because of poor productivity.

JEL Code: E23, E32.

Full article (PDF, 54 pages, 2,303 kb)