Potential employment in the UK economy

Quarterly Bulletin 2007 Q1
Published on 19 March 2007

By Richard Barwell, Venetia Bell and Philip Bunn of the Bank's Monetary Analysis Division, and Maria Gutiérrez-Domènech formerly of the Bank's Monetary Analysis Division. 

This article discusses a range of factors that may shift the level of UK potential employment - that is, the amount of labour that can be sustainably employed by UK companies to produce goods and services. The level of potential employment reflects four factors: the size of the adult population; the willingness of that population to participate actively in the labour market; the sensitivity of wages to the unemployment rate; and the average number of hours that people are willing to work when employed. Rapid growth in the UK population has been the primary source of growth in potential employment over the past ten years. Structural changes in the labour market are likely to have also enabled a modest increase in the equilibrium participation rate and a decline in the equilibrium unemployment rate which would have further boosted potential employment. But those developments have been partly offset by the continued downward trend in desired working hours.

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