Labor Market Slack in the United Kingdom
This paper examines the amount of slack in the UK labor market. It examines the downward adjustments made by the Monetary Policy Committee (MPC) to both unemployment and underemployment, which in our view are invalid. Without any evidence the MPC in its assessment of the output gap reduces the level of unemployment because of its claim that long-term unemployment has no effect on wages. We produce contrary evidence. The MPC further reduces the level of underemployment in the United Kingdom by half. We present arguments as to why we also think this inappropriate. We set out arguments on why we believe the level of slack is greater than the MPC calibrates. Consistent with that is the fact that real wages in the United Kingdom continue to fall.
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