(Bloomberg) — Two Bank of England policy makers said Britain’s tight labor market is feeding a wage-price spiral, with one suggesting that unemployment may need to hit as high as 6% to tame inflationary pressures.Most Read from BloombergBOE rate-setter Jonathan Haskel said the natural rate of unemployment has likely risen sharply to an “upper bound” of 6% because of a lack of workers with the necessary skills to fill job vacancies and a decline in the openness of the UK economy. He later clarified that his central estimate for the neutral unemployment rate is slightly higher than the BOE’s base case of 4.5%.Chief Economist Huw Pill said tightness in the BOE must be “less sanguine” about inflation because of those pressures.The remarks underscore the BOE’s bias toward further interest rate increases, a sharp contrast with investors who increasingly expect the central bank to cut rates after the middle of next year. Pill and Haskel both talked about pressures in the labor market that mean the BOE needs to remain on guard against inflation for the foreseeable future.An increase to 6% unemployment would imply more than 500,000 job losses and the highest level of joblessness since 2014, the aftermath of the global financial crisis. It would mark a sharp rise from the current rate of 4.2% and exceed the BOE’s own estimate for the level to reach 5.1% by 2026.Together, the remarks by Pill and Haskel suggest the BOE is looking for a much larger loosening in the jobs market to bring inflation under control. The central bank’s rate-setters estimated on Thursday that the natural rate of unemployment, known as U* by economists, is higher than first thought, meaning joblessness will need to rise further to weaken the bargaining power of workers.Story continuesHaskel — one of three dissenting rate-setters to vote to restart the BOE’s hiking cycle on Thursday — indicate he will continue to push for more rate rises to tame inflation.“Recent wage data is consistent with the idea that the “underlying” unemployment rate, U*, has risen,” Haskel said in the text of a speech on Friday.Haskel said the 6% estimate “sits neatly in this range” of what is “plausible” for the underlying unemployment rate. But he stressed it was likely to be an “upper estimate.” That he said is up from just above 4% before the pandemic.An impaired labor market may mean interest rates need to “remain higher for longer than would otherwise be the case,” according to Haskel.Haskel said the natural rate of unemployment is being driven up by a worsening labor “mismatch,” where workers with available skills are not so well suited to the available vacancies.He said part of the problem may be a “less open economy” than before the pandemic, an oblique reference to Britain’s departure from the European Union and a jump in the number of people dropping out of the workforce.A more open economy improves the bargaining power of companies since they can draw staff from elsewhere or move production if wages rise too much. However, a decline in openness in the UK since the pandemic has improved the bargaining position of workers, Haskel said.The BOE’s nine-member policy panel voted to hold rates at 5.25% for a second consecutive meeting on Thursday. Governor Andrew Bailey said it’s too early to talk about the possibility of reducing interest rates.Pill warned on Friday that the strength of the labor market and soaring wages mean that policymakers can’t yet turn their focus away from fighting inflation.He said in a web event that “more persistence in wage and price dynamics” suggest “we can be less sanguine” about a slowing economy reducing inflation.“The overall position of the labor UK labor market, although loosening, still remains pretty tight by historical standards, and that is what underpins some of this potential persistence and strength in wage developments,” he said.A day after the billionaire Elon Musk said artificial intelligence technology would make jobs unnecessary in the future, Haskel brushed aside those concerns. He said many positions require tasks that can’t all be done by AI.“People think about jobs,” Haskel said. “That’s the wrong unit of analysis. The correct unit is the task.”(Updates with comment and context from the first paragraph.)Most Read from Bloomberg Businessweek©2023 Bloomberg L.P.
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