Could unemployment go back to the post‐war heyday?

▀ The current ‘low’ rate of unemployment looks less impressive when compared with the 2–3% rates averaged in the 1950s and 1960s. But both then and now share a common driver of low joblessness – pay growth falling unusually short of productivity gains. While the chances of this continuing look stretching, a return to genuine full employment is not completely implausible. ▀ Why was unemployment so low in the early post‐war period? Given the current uncertainty over how far joblessness can sustainably drop and how this affects monetary policy, our analysis provides useful insights for the situation today. ▀ Several explanations have been mooted. A political commitment to full employment is one, although aspiration alone cannot provide a cause. And demand management using fiscal policy is hard to square with the period's modest budget deficits. Meanwhile, booming post‐war investment and trade and shortages of labour fail to explain why low joblessness did not quickly trigger rapid rises in pay and inflation. ▀ The cause of very low unemployment appears to have sat with wage restraint relative to productivity gains. Unlike most of the last 70 years, real pay growth consistently fell short of productivity rises in the 1950s and part of the 1960s, cutting the cost of workers and ensuring a low ‘equilibrium’ rate of unemployment. ▀ This explanation has parallels with the present day. Since 2010, productivity growth has outstripped real pay rises to an extent not seen since the 1950s. We do not expect this pattern to continue – our forecasts show real pay running slightly ahead of productivity growth over the next five years. But if the factors holding back pay were to persist, alongside a catch‐up in UK productivity, a return to a 1950s/60s‐style jobless rate is possible, if the MPC did not take fright at further declines in unemployment. [ABSTRACT FROM AUTHOR]