24 MARCH 2009  MR MERVYN KING, MR PAUL TUCKER, MR SPENCER DALE, PROFESSOR TIM BESLEY AND PROFESSOR DAVID BLANCHFLOWER

  Q100  Chairman: Professor Blanchflower, you mentioned yesterday in your speech about unemployment being three million and there is some suggestion of it going to four million by 2012. How do we deal with that?

  Professor Blanchflower: In some sense it was partly answered with my last question, that there has to be some focus on trying to create jobs. One of the things we can do is take advantage of one of the things that naturally happen in a recession, which is there is a great demand for more education, so that is something I have encouraged. We have to think strongly about how we are going to create jobs at a time when simply the numbers are swamping us.

  Q101  John Mann: Page 27 of the Inflation Report, paragraph 3.3 reads: "Downward pressure on wages may be dampened by a reduction in the effective supply of labour". What is the evidence base that there is a reduction in the effective supply of labour?

  Mr King: Let me ask Mr Dale to answer that.

  Mr Dale: In some sense one of the only encouraging aspects of the labour market at the moment is we have not seen the fall-off in participation in the labour market that we may have expected. In previous recessions as unemployment rises we found people became discouraged, they could not find work and tended to leave the labour market, and that was one of the indications we expected to see, one of the factors we expected to push down on the supply of labour. One of the features of the data we have seen thus far is participation rates are staying high, people are staying actively engaged in the labour market, they are actively seeking work. Indeed, another feature of the data we observe at the moment is outflows from unemployment back into employment also remain high.

  Q102  John Mann: So you are contradicting your own report then because your own report says the opposite is going to happen.

  Mr Dale: Indeed.

  Q103  John Mann: So why is that in the report then?

  Mr Dale: Because one of the features we have been surprised about since we wrote the report is the extent to which participation rates have remained high and that is an encouraging sign.

  Q104  John Mann: What is discouraging is that your report is suggesting the opposite direction from what your evidence base is which suggests that the labour market analysis is not sufficiently robust. Let me ask a different question on the labour market. How many migrants have entered the UK since October and how many have left?

  Mr King: I do not think we have any means of knowing.

  Professor Blanchflower: I do not have an answer to that.

  Q105  John Mann: It is important to know.

  Mr King: It may be important to know but you, as parliamentarians have not put in place a process by which these are measured.

  Q106  John Mann: I am not looking at blame. I am interested in the evidence base on which you are writing this report. Am I right in thinking that there is a labour market analysis on statistics that are not there and there is a presumption in it that may, therefore, be wrong?

  Professor Blanchflower: The standard assumption in the textbook and the standard thing we have seen in previous recessions is as unemployment rises people leave the labour force and migrants will leave the country because they see there are not any jobs here. That is a standard thing to expect. This is a unique thing. It has started to happen in the US and it is happening here. People have actually increased their participation and some of it reflects the decline in their savings, the decline in pensions and so on. In some sense you could argue it is encouraging that they have not left but, on the other hand, my view is it is a response to financial distress. Within the family the husband is unable to work as much perhaps, there is a reduction in hours, and the family feels less confident so an additional member of the family participates. We have not seen that before. These are new events that are really occurring. The standard expectation that you teach to all labour economics students is the opposite. That is an unfolding event.

  Q107  John Mann: So we can expect a rather different narrative in the next Inflation Report from what you are saying.

  Mr King: It depends on the data.

  Q108  John Mann: Will you have the data? Every other major global recession has led to mass migration of labour and the transportation possibilities now are greater than they ever were. We have had major riots this year in a number of EU countries. Can we expect to see and, more critically, do you need the data on whether we are seeing, significant changes in emigration or immigration from this country in terms of the real labour supply?

  Mr King: Certainly we have said for some time that in order to analyse the labour market or, indeed, for that matter levels of demand, we would like to have much better data on migration. We do not have those data and I think there ought to be enormous confidence intervals around the estimates that people make of those numbers. The database which is used to construct those estimates is not good.

  Q109  John Mann: Are there major regional disparities in terms of the performance of the labour market and, indeed, of the economy that are worthy of particular attention?

  Professor Blanchflower: In a way, the sad part about this recession is that it is really located everywhere, it is not predominantly in a particular place. Perhaps the only real surprise is that Scotland has done relatively better than it has done in the past. This is a set of events that seems to cover all sectors and all regions.

  Q110  John Thurso: Can I ask you one quick question. Throughout this crisis you have underlined the importance of getting credit flows back into the real economy, and I think that is particularly important with SMEs. The Government has put in place a series of schemes designed to enable the banks to lend where the banks commercially might not otherwise. What was referred to earlier was that there is a clear disconnect between the desire for that money to go in at the top and what every company is telling all of us out on the street. Is there any way the Bank's agents can monitor this so that we can know what is happening because if you ask a Government minister they tell you it is all working wonderfully and any MP anywhere will tell you of the problems he has got. Is there any way the Bank can help by getting factual data as to what is really happening?

  Mr King: Of course we do get data from the banks about lending as part of our normal statistical reporting. It is those data that lead me to this conclusion that so far the growth rate of lending will still be positive but it has been declining very sharply and we have not seen any sign of recovery. That may change.

  Q111  John Thurso: It was not on the wider issue, just on the specific issue of are the schemes doing what they are meant to do?

  Mr King: There are two aspects on that. One is we can nationally get data on certain subsets of borrowers, so we can look at corporate lending and within that we can try to look at SMEs. The question of whether the schemes are working is difficult because you have to have a counterfactual, what would have happened had the scheme not been introduced, and that is almost impossible to say. We can try to provide a broad picture of what is happening in absolute terms to lending to these different sectors. I totally accept the comments you have been hearing as you have made your regional visits are very similar to the comments that we have been hearing and are being fed back to us by our agents. That suggests that we are still waiting for signs of improvement. That does not mean to say we will not get it. The lending agreements which are meant to be serious, and I hope will be monitored carefully, have only recently been signed. We will see in our Credit Conditions Survey and in the Bank's Survey of Bank Lending whether this starts to improve in the next few months. That is something we will monitor very carefully because it clearly is germane to the question of the timing of our ability to get out of recession.

  Q112  Chairman: Governor, I know you want to be away for 11.30 but I have got a last question for you. The Inflation Report says that many specialist institutions focused on lending to riskier customers and they have now exited the market. Do you welcome or bemoan that exit?

  Mr King: Let me ask Mr Tucker to talk about this in his capacity as Deputy Governor for Financial Stability.

  Mr Tucker: I do not think they will come back for quite a long time. We can build a system for underpinning the banking system, with difficulty but more readily than we can build a system for underpinning essentially unregulated intermediaries in credit. The fact that they have withdrawn in this crisis has plainly made the crisis a lot worse, but I would not expect them to re-enter for quite a while.

  Chairman: Governor, thank you very much for coming this morning.