In the News

UK Economy - Why a workforce exodus might cause interest rates to climb higher

Graham Watson

24th November 2022

An interesting angle here on the current state of the UK economy, with the Chief Economist of the Bank of England, Huw Pill, arguing that as a result of the adverse supply-side shock that the 500,000 decline in the UK work force has caused, the Bank could be forced to tighten monetary policy further than it would like.

Students might want to think about this is AD-AS terms, starting with the impact of a declining workforce on the position of the LRAS curve, and then use that and the existing cost-push inflationary pressures to think about the current equilibrium. They might then consider why the Bank of England feels the need to raise interest rates to the extent that it does.

Some quotes from Pill's speech

"Monetary policy cannot be put on an autopilot. Any plan has to be conditional on economic conditions, and responsive to economic shocks and disturbances."

"Behind the labour market tightness lies a decline in participation rates among the working age population, particularly those in the 50-65 age group. The reasons behind this decline remain the subject of controversy, but the impact of the pandemic on early retirement and long-term health, as well as underlying demographic developments, all seem to have played a role.10 Crucially – and just like the rise in gas prices – rising inactivity among the working age population represents an adverse supply shock, which adds to the difficult shorter-term trade-offs facing monetary policy."

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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