Cheap labour will not last forever warns Bank of England chief

People have felt “compelled to work” he said, adding: “Sharp falls in wealth and increased uncertainty about future incomes following the financial crisis have undoubtedly changed many people’s retirement plans, making them work longer and retire later in order to compensate,” Mr Carney said. “The scale of the debt accumulated by Britain’s households in the run-up to the recession has encouraged more people to work, and to work longer.”

Four in 10 households said they were “concerned” over their debts in a recent Bank survey and one in 10 said they were working more because they were worried about repaying these debts.

Mr Carney said that while this “labour supply shock” caused lower wages that have involved a “painful” adjustment, it has created higher employment and created foundation for a “durable” expansion and recovery.

“Keeping people in work through a recession maximises the prospects for individuals and the economy,” the Governor said. “By staying in work, individuals retain and learn new skills. And they are better placed to participate in the expansion when it gathers force. For the economy, maintaining workforce attachment is the best way to ensure that cyclical downturns in aggregate demand for goods and services do not translate into permanent reductions in our economy’s potential to supply them.”

This has created an opportunity to “reach and sustain a higher level of employment than in the past” Mr Carney said, adding that wages would also increase.

“As employment approaches its new higher level, wage pressures should increase and capital investment should continue to recover,” he said. “Productivity growth should pick up bringing the higher, sustainable pay rises that British workers deserve.”

The Bank’s latest forecast predict real wage growth to resume in the middle of 2015 as the jobless rate falls to about 5.5pc over the next three years. By the end of the bank’s forecast in 2017 it predicts 4pc pay growth.

To reach these predictions Mr Carney said the “challenge” is to “secure a durable recovery” having seen the impact that his “forward guidance” policy that pledged not raise rates until unemployment fell below 7pc. The undertaking gave businesses the confidence to hire he said and as a result Mr Carney said Bank is increasingly focusing on the labour market to help it decide the timing of interest rate rises.

He said that this meant the Bank’s forecasts – and therefore its rate decisions – are based on judgements that:

*the number of people in the labour force will continue to rise, hitting 64pc of the population later this year

*the unemployment rate the economy can sustain without inflation accelerating will be the 5pc level seen before the recession, and at 5.5pc now is only a touch above that

*the number of hours people work can increase, halving the current gap between actual worked hours and desired hours.

The Governor said that indicators point to there still being “slack” – or unused capacity – in the labour market which needs to be used up before wages begin to pick up. Mr Carney said the Bank’s rate-setting committee expects it to tske “the better part of three years” for the margin of “wasteful” slack to narrow.

However, Mr Carney said that there was no timetable for rate rises, adding: "We have no pre-set course; the timing will depend on the data."

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