Examination of Witnesses (Questions 100-119)
MR MERVYN
KING, MS
RACHEL LOMAX,
MR CHARLES
BEAN, MS
KATE BARKER
AND PROFESSOR
STEPHEN NICKELL
28 MARCH 2006
Q100 Kerry McCarthy: In the past
there has been an admission that the contribution of software
investment has been seriously under-estimated. Do you think the
new methodology that has now been adopted by the ONS is appropriate?
Mr King: Yes, I think we feel
it is appropriate. It has been quite a long time in the making.
Our staff have talked to the ONS staff. It does not really affect
our view of the economy. Essentially what is happening is that
a certain amount of activity that used to be deemed as intermediate
activity and not final demand has been redefined as final demand.
So the level of total demand will be revised up over quite a long
period, but it is not going to make a very noticeable change to
the growth rates over time. In terms of our conjectural assessment
of the economy—where the economy is and what is likely to
happen—this is not going to have an impact even though it
does have a noticeable effect on the total level of estimated
final demand.
Q101 Mr Gauke: I was going to raise
the question of pension fund deficits because certainly one explanation
that has been suggested to this Committee is that it is one of
the leading factors in reducing business investment. I would just
be grateful if you could elaborate on that point and say what
consideration the MPC has given as a whole to the idea of pension
fund deficits being a factor in this area.
Mr King: It may well be and I
think we certainly could not rule it out. I will ask Charlie to
talk in a moment about an empirical study which some members of
the Bank carried out on this issue which did not come up with
very much supportive evidence for it. It is very difficult to
expect to find it because if you ask individual businesses about
decisions, from their point of view, quite rightly, it is the
strategy of their business, what is happening to their product,
which is going to drive their decisions. From the point of view
of the economy as a whole, when you are aggregating across all
these different businesses, you would expect to find the more
impersonal factors, such as relative costs of labour, changes
in productivity growth and the cost of capital to be having an
impact in explaining the total level of investment. For any individual
business, by far and away the most important issue is their particular
market, the strategy that they are following. They will be looking
at very different factors for driving their investment decision
as we might look at in trying to explain the total level of business
investment as a whole. Since pension deficits must be a major
factor facing a large number of firms, where the size of the deficit
will look big relative to their likely cash flow or in some cases
even the net assets of the firm. Some companies look more like
little operations attached to a pension fund and for them, the
pension fund must be a major issue. It does not follow from that
that you can easily track annual movements of investment as being
particularly closely linked to changes in pension deficits, which
themselves can move around a lot. Actuaries change their views
about the appropriate way to measure these things as the numbers
on longevity and real rates of interest in the economy also alter.
We did do a study on it and perhaps Charlie can say a bit about
it.
Mr Bean: There were two strands
to it. One is looking at the behaviour of aggregate investment
relating to the normal sorts of determinants that people believe
might affect investment, demand, profitability, things like that
and seeing whether there is any additional explanatory power for
including a measure of pension fund deficits in that relationship.
That has failed to turn up any effect. However, it should be said
that most empirical models of investment are singularly poor.
Steve, Mervyn and I all started our professional careers as academics
trying to estimate investment equations, but we all realised that
it would be sensible to move on to something more practical! We
think the fact that the aggregate study did not turn up any very
significant effect is not particularly revealing or particularly
surprising. We have also tried to look at the behaviour of different
sorts of firms, comparing the investment behaviour of firms with
large pension deficits and those with smaller pension deficits
relative to their sales. Again, there is not any strong indication
there that those with larger pension deficits relative to their
sales have acted as a drag on investment. But again, the empirical
results are not very clear and strong. Rachel has already reported
our agents' survey, which, again, seems to suggest it was not
very important but, on the other hand, when we go round and talk
to business people on our agency visits, I can guarantee that
it comes up around the table as a restraining factor for some
businesses. So I think we are very much in a position where it
is unclear exactly how significant an effect it is having.
Ms Lomax: The incidence between
different firms varies widely. For some old-established firms
that have had good pensions schemes, this could be a very big
issue indeed, but within the same industry, you get relatively
new firms for whom it is not an issue at all. So even at the anecdotal
level there is a lot of unevenness. On the question of whether
you would ever expect to pick it up econometrically, this is an
issue which has raised itself in importance and salience dramatically
in the last few years, so I think some of these longer run studies
would not really pick it up—the last two years really, so
I think it is a bit soon to hope to get it out through conventional
techniques.
Q102 Mr Gauke: To what extent do
you think the problem with pension fund deficits is caused by
the fact that we have relatively low interest rates at the moment?
If interest rates rose, rather counter-intuitively, you might
see an increase in investment. Is that a fair point?
Mr King: We are the Monetary Policy
Committee, not the Monetary Pensions Committee. I am sure one
could spend hours debating issues of policy on pensions, and that
is probably not for today. We do not see ourselves as experts
on that. What we are trying to do is to ask ourselves how these
issues will affect spending in the economy. Broadly speaking,
our view would be that, as far as households are concerned, it
is certainly quite possible that the outlook for pensions in the
economy will affect their desired savings rate. This is likely
to be a slow-burn, medium-term issue, not something that will
drive quarter-to-quarter movements in consumer spending. It is
a longer-term thing that we look at when trying to form a judgment
about where the saving ratio will go.
Q103 Mr Gauke: Looking at the economy
as a whole, do you have a concern that there could be this misallocation
to low-risk investments rather than looking for new business investment
because of a concern about pension fund deficits? Is that something
that is high on your agenda or not?
Mr King: I do not think that is
the issue here on pensions, unless you think the overall level
of physical investment is going to be affected. Where the physical
investment in the economy goes depends on which opportunities
are profitable. The question about pension funds is who bears
the risk in the economy. In the past we have had companies with
pension funds attached to them which were mechanisms by which
they were engaging in very substantial cross-company share purchases,
buying shares in each other to put forward a sort of moneybox
to fund pensions. That is a risky thing to do where the pension
promise is not contingent on the performance of the fund. So I
think the whole debate about the private sector pension scheme
is a debate about who bears the risk, and that is rather different
from a question about what assets are the economy as a whole investing
in.
Q104 Jim Cousins: I wonder if I could
ask the Deputy Governor, who made a very interesting speech at
Chatham House earlier this year, with lots of interesting issues
which I would like to explore but really cannot use this occasion
to do that. You did say—this is just one sentence—"Policy
makers need to ensure that their policies are robust to the possibility
that market expectations may not be consistent with economic fundamentals."
That does seem to imply a course of interest rate setting that
would be perhaps slightly higher than you might expect to contain
these potentially incorrect market expectations.
Ms Lomax: I am not sure it has
quite that implication. What I had in mind was that it is very
consistent with the way we think about risks, and that you need
to be alive to the possibility that there could be an unwinding
of very low interest rates, for example, and think through what
impact that might have on your forecasts, in considering how your
fan chart looked. It is that sort of thought that was in my mind.
It does not necessarily mechanically link through to a super-cautious
approach to setting interest rates.
Q105 Jim Cousins: So reining in market
expectations plays no part, as you see it, in the Bank's setting
of interest rates?
Ms Lomax: No. When we set interest
rates we are hoping to influence market expectations. That is
part of the transmission mechanism. If we simply set interest
rates at the very short end and they had no other consequence
at all, banks would not change mortgage rates and the other interest
rates which affect people's behaviour would not change. So we
are always attempting to influence longer-term interest rates
by what we do and by what we say. We are trying to persuade people
by the clarity of our thought.
Q106 Jim Cousins: Just following
on that stream of thought, in the Quarterly Bulletin there is
some fascinating material on the staggering scale of leveraged
buy outs. The description of this plays a very large part in the
description of market operations in the Quarterly Bulletin. In
your own speech in Ashford you referred to risk premia, that they
may have become unusually compressed and investors may be taking
on more risk. You said, "It is questionable whether such
behaviour can persist." Do you have real concerns about the
scale of leverage buy-outs, private equity activity, hedge fund
activity which are referred to in the Quarterly Bulletin?
Mr King: I do not have concerns
about the flows of funds through those mechanisms, no, but to
go back to the question you put to Rachel just now, I think we
are trying to influence market expectations of inflation. In terms
of expectations of asset prices, or equivalently, risk premia,
I do not think we are trying to say to markets this is where they
should go, but sometimes we do pose a question. That is why I
said in a speech it is questionable. I do not think we have the
answer to it but I do think from time to time that we simply say
to markets "Ask yourselves the question, is this risk premium
or price level sustainable?" That is not the same thing as
trying to give a coded signal that it should move in a particular
direction or by a certain amount, because we certainly do not
know that. There is no way that we can do it. But I do think from
time to time it may be that we want to say to people that if you
look at past behaviour, this is clearly very unusual relative
to the past. There may be good reasons why that can continue.
It may well be at present that there are good reasons why risk
premia can be exceptionally low, and we have pointed out that
a whole range of risk premia in credit spreads are, historically,
extremely low. As long as people ask themselves the question "Am
I willing to buy and sell assets at this low level of risk premia?"
and they have thought about it and answered yes, then that is
fine But from time to time a central bank may feel the need simply
to pose the question. It is no more than that. There is no way
that we can possibly have the knowledge to tell markets or imply
to markets that something is mis-priced. We are not in a position
to know that, but we are in a position sometimes just to pose
a question.
Q107 Mr Newmark: I think Mr Cousins
actually asked an important question there. There is far more
private equity funding flowing into the economy, so that up to
20% now is actually in the UK economy. I think the danger is on
the debt cash flow that is being borrowed at the moment, so that
whereas debt/equity ratios were far lower historically, at the
moment private equity firms are borrowing far more against cash
flow, and if there is a disruption at all in the debt markets,
this could have a big impact on the economy if interest rates
suddenly moved.
Mr King: I think if there were
to be large and dramatic moves in interest rates, it would not
just be private equity firms that would find themselves in some
difficulty; a large range of institutions, including many households,
would find themselves in difficulties. The whole point of our
framework is that we hope to avoid very large and disruptive movements
in interest rates. The deeper aspect of this question, which goes
to the point that Rachel made and the question that Mr Cousins
asked, is what do central banks know and what should they be suggesting
to the wider public? To repeat what I said, we do not know enough
to say to someone that a price level is inappropriate. We do sometimes
say, "Let's look at the historical experience. Here are the
facts. This looks clearly very much out of line with the past."
There may be good reasons for that. The future does not have to
look like the past, but just think it through, and if you have
a good reason, that is fine, but our job sometimes is to pose
a question. I put it no more strongly than that.
Q108 Jim Cousins: I wonder if I could
turn to Professor Nickell, being led by the Governor's thoughts
that I have been talking about the top end of the range risk,
but there was a very interesting article in the Quarterly Bulletin
which throws some important light on the bottom end of the range
risk. In an article about the distribution of assets, for example,
your research teams tell us that one in eight of British households
have negative net worth. Are you concerned about this? You have
suggested that there was a potential for serious problems for
distressed households on low incomes because of their exposure
to debt, both secured and unsecured.
Professor Nickell: Yes. There
are two aspects of household debt which are important in this
context. One aspect is how it affects the macro-economy, how it
affects monetary policy and so on, and the other aspect is how
this issue affects the division in social welfare. My instinct
is that the position of households at the moment in terms of risks
and dangers is more geared to the latter than the former, that
is to say that I think that social welfare issues are perhaps
more important than the macroeconomic issues. By and large, if
you look at household debt as a totality, 95% of all household
debt, including unsecured debt, is owed by households who are
owners of property or mortgage holders. There is only 5% of all
debt which is owed by people who do not have properties. However,
if you do surveys and say which households are most in trouble
with debt, the majority of people who are most in trouble with
debt are poor people, and that is hardly surprising, because poor
people often have relative to their incomes quite a lot of debt,
and of course, they do not typically have access to the low levels
of interest rates that wealthier people have. In fact, the interest
rates they face are often extremely high indeed. So there are
these two aspects of debt, and I think while the social welfare
aspects of debt are fantastically important, of course, for monetary
policy they are not very significant because they are just not
very big in the economy as a whole. So are there issues with regard
to monetary policy in the macroeconomy? One important factor is,
of course, that the sheer volume of debt is vastly greater than
it was 30 or 40 years ago, in the main because the sheer volume
of owner occupation is vastly greater, and house prices are higher
anyway relative to incomes. So there is naturally going to be
more debate about, and in those circumstances, does it make a
difference to monetary policy? The answer is yes, it probably
makes household behaviour somewhat more sensitive to interest
rates, because if you have vastly more debt around, then changes
in interest rates mean more to more households. This comes through
basically because the households who owe money, their expenditure
tends to be more responsive to interest rate changes and income
changes than households who lend money.
Q109 Jim Cousins: Governor, in the
Chancellor's Budget speech last week he, rightly, took credit
for a long period of economic stability, and I think he did also
say that you and your team have played some part in that. Do you
think that an element of moral hazard has crept in here, that
we are all taking you and your team for granted, and your successes
for granted, and that perhaps both at the top end of the range
and the bottom end of the range, people are taking on more risk
than ultimately they will be able to bear?
Mr King: It is a very interesting
question. It is not easy to know the answer. Let me give arguments
on either side. I think the Chancellor is right to take credit
because, in my view, the success of the MPC is the success of
the institutional framework. One thing which we are all very conscious
of—and I think all past, present and future members of the
MPC would be very conscious of—is that any of us could fall
under a bus tomorrow and it would not make any difference. The
success of the MPC is due to the institutional framework, not
to the individual members of it. In that sense, people would be
justified, I think, in thinking that the framework is likely to
continue. There is no reason why this could not go on indefinitely.
On the other hand, where I am slightly worried is if people draw
the conclusion that the extent of the stability that we have seen
to growth and inflation can continue at the same level. I think
the Chancellor and everyone else is perfectly right to claim that,
with this sort of framework, we should be able to avoid the big
monetary policy mistakes of the past. I do not think it follows
from that that you can expect always to see positive growth in
every single quarter for ever. There will come a point when there
will be a shock to the world economy, whether it is from Europe,
from the Far East, from the United States, or indeed whether it
is due to some change in sentiment at home, that means that we
may well have—for a short period—a period of negative
growth. The key thing is not that we have that, because that in
itself is not particularly damaging; the key thing is that the
Committee would respond to it and would change interest rates
in such a way as to bring growth back to its sustainable rate
and inflation back to the target. That is what should give people
comfort. So my slight concern would be that if people believe
that this extraordinary degree of stability can always be maintained
in the same quantitative sense, they may be having a slightly
optimistic view. But I do not want to encourage people to go to
the opposite extreme and suggest that the big swings that we have
seen in the past should be characteristic of the future. There
is no reason why we cannot have a kind of stability which other
major successful Western economies have had over a very long period.
Q110 Chairman: Governor, the FSA
came out with a report this morning on the establishment of a
baseline, and they took a number of data snapshots of the population.
I have a couple of the conclusions here: 70% of people have made
no personal provision to cover an unexpected drop in income, and
of the 1.5 million who say they are falling behind with bills
and credit commitments, one-third say they have real financial
problems and 2 million households say it is a constant struggle
to keep up with commitments. Whilst that would not affect the
macroeconomic framework, are there any comments you have on the
behavioural characteristics of the UK population at the moment?
Mr King: I think that is going
beyond our basic remit. I share Steve's view. There are concerns,
and I said this before, that a minority of households have got
themselves into quite serious difficulty. I have said for a number
of years now on several occasions, both in connection with the
housing market and mortgage borrowing, but also more generally,
that it is very important for people to think before they borrow.
Once people have got into difficulties, of course, that may be
rather too late for them to think but it is something that everyone
should take on board. There will be a period now in which a number
of families will have to work through some quite serious financial
problems which have resulted from the expansion, particularly
of unsecured, borrowing in recent years. As Steve says, that is
not primarily a macroeconomic issue; it is more a question of
concern to your Committee and to FSA if they feel that the way
in which loans have been made or encouraged has gone too far.
That is really, I think, a matter for you and FSA and those people
concerned with what Steve described as the social welfare implications.
Our job—and I think the only reason the Committee will continue
to be successful is if we focus on our one remit—is inflation
and stability of the macroeconomy. From that perspective, as Steve
says, although there may be some small change in the sensitivity
of the economy to interest rates, overall we do not see the build-up
of unsecured debt as posing a particularly major issue for macroeconomic
policy.
Q111 Chairman: Steve, given that
you are retiring, give us a fulsome answer. Can you add to what
the Governor said?
Professor Nickell: I did have
some thoughts on this subject. I think the key issue is employment
security and income security. It is true that people do not have
fantastically long memories. It is less than 15 years ago that
there was a very rapid rise in unemployment and a lot of people
were made redundant, and that has had quite strong implications
for what was happening in the economy as a whole and the housing
market and so on and so forth. It is always possible that there
will be a shock which is big enough to make that happen again,
and which we could not eliminate by monetary policy. In some sense,
when people take out mortgages, when they borrow substantial sums
of money, they generally think in terms of life carrying on as
it is today. Touch wood, they are right to do so, but there is
always this risk, which even the greatest monetary policy in the
world could not eliminate. There is always that kind of danger
around, and the economy is a more dangerous place than a lot of
people now think.
Ms Lomax: Can I just make an observation?
I think people's personal circumstances are also highly uncertain.
Even if the economy were enormously certain, people's personal
circumstances are subject to all sorts of risks. It does seem
to me that a lot of this is down to something which is right outside
our remit but it is still important, which is that people's understanding
of financial matters simply has not kept pace with the opportunities
on offer. People do not have the grasp of financial issues that
is necessary to cope with the financial products that are available
to them. Financial education has just got to be a large part of
that. That is not something that we are deeply into, though we
do produce materials, resources, for schools which are helpful
in citizenship classes, giving people some general awareness about
issues to do with inflation and monetary policy in a very broad
sense. I hope we may be making some contribution to basically
improving the level of education about these things, but I think
that is the fundamental issue.
Chairman: Just to reinforce that point,
the FSA's report this morning said that 40% of people who own
an equity ISA are not aware that its value fluctuates with stock
market performance, and 15% people who own a cash ISA think its
value does. Given that those are the more high-value end of the
market, there are possible big problems for us.
Q112 Mr Gauke: Can I turn to spare
capacity. Professor Nickell, you mentioned earlier that you believed
there was a fair amount of spare capacity in the economy at the
moment.
Professor Nickell: It depends
what you mean by "a fair amount."
Q113 Mr Gauke: Can I ask all of you
what your view is on the amount of spare capacity in the economy
at the moment?
Professor Nickell: I said that
I had heard that unemployment had gone up by about 0.5% of the
labour force, so there is 0.5% in some sense, plus what firms
can do without employing any more people. As far as the surveys
are concerned, it seems they have a certain amount of capacity,
which is, of course, the other side of the coin from the fact
that the productivity growth has been very low, partly, we think,
because of labour hoarding, which suggests that a bit more output
could be produced without hiring anybody. The total amount of
the spare capacity is not large. If one adds the 0.5% plus a bit,
so between 0.5-1%, it is hard to describe that as a substantial
amount, but nevertheless, between 0.5-1% means that if it is to
be eliminated, you do need some above-trend growth. So there is
some spare capacity.
Mr Bean: Small but highly uncertain.
Ms Barker: My own reading of the
capacity surveys is that in fact, if you look back into the peak
of the economy in 2004, it looked as though capacity was actually
pretty tight. Firms' capacity surveys have fallen back since then,
but by historical standards, they are not particularly low. So
I guess I think there is a little bit less spare capacity than
Steve does, but I also agree with Charlie; it is pretty uncertain.
Q114 Mr Gauke: The Chancellor seemed
to take the view in his Budget last week that actually, there
was a fair amount of spare capacity in the economy. He talks of
a reasonably substantial output gap. Can I ask your views as to
what extent you disagree with that assessment and why?
Ms Barker: I must admit that I
have not had the opportunity since the Budget to read the Budget
documents carefully so I do not actually know what the Treasury
said on the output gap. I have explained why I think the output
gap is not particularly large at the moment. I agree with Steve's
comments on the labour market, and I have made the points about
capacity, and we do of course approach it in a slightly different
way, but it is very uncertain how big the degree of spare capacity
is. This Committee has also made the point over the past year
or so that this whole concept of spare capacity in the UK has
become much more uncertain with the increasing use of migrant
labour. So it is actually pretty difficult to be definitive about
what spare capacity is at any point in time.
Mr Bean: The one thing I think
that is worth stressing is that spare capacity is not something
that we directly observe, the output gap or anything like that.
Whereas we can, roughly speaking, observe GDP and we have the
ONS to measure it for us, there is no direct measurement of potential
output, and you can only talk about that in the context of a particular
model and develop ways for trying to measure it indirectly. The
Treasury adopt a very different approach to measuring the amount
of spare capacity in the economy from the way we do. We tend to
build it up by looking at the margin of unused resources in both
the labour market and the product market, looking at business
surveys and so forth. They have a more top-down approach, and
that may well be more suitable for their slightly longer-term
perspective. I think it is fair to say we take a view that has
a smaller margin of spare capacity than the Treasury envisages
at the moment. But, as I said before, it is highly uncertain,
so their estimate comes well within my confidence interval.
Q115 Mr Gauke: Professor Nickell,
do you have anything to add?
Professor Nickell: No, not really.
I do not think the Treasury's estimate of spare capacity is that
big actually. It would not be fantastically different from where
I see it, and Charlie is a bit below me, but we are talking rather
tiny numbers here.
Q116 Mr Gauke: I have the Red Book
in front of me. For your information, because it is a chart that
is not necessarily clear to see, that the output gap for 2006
it is between 1-1.5% seems to be what they are suggesting. The
question I have, I suppose, is that Professor Nickell, you tend
to be closer to where the Treasury is on this.
Professor Nickell: I said between
0.5% and 1% and they say 1-1.5%.
Q117 Mr Gauke: Yes, but you are perhaps
closer than your colleagues. Your view, if I understand it correctly,
is that interest rates should be coming down. I would like to
ask those who hold a stricter line on this whether, if you believed
the Treasury forecast, you would be more inclined to lower interest
rates, because it seems to me that that is the implication of
the Treasury assessment, that interest rates should be reduced.
Mr King: Can I go back to Charlie's
point about the output gap being something that only economists
ever talk about. The most embarrassing cartoon of me that was
ever published followed the appearance of the film "Notting
Hill", in which the Daily Telegraph, I think, took
off the head off Hugh Grant and replaced it with mine, having
dinner with Julia Roberts, with the caption: "Mervyn King,
seen here explaining the output gap to Julia Roberts." I
think the point of this is to illustrate that the output gap does
not actually exist in the real world. It is an abstract concept
that economists find useful but it does not correspond to anything
you could go and measure. Maybe, given the Red Book, it should
be a cartoon of Gordon Brown explaining the output gap to Julia
Roberts, and maybe he would have more success, but I am not at
all convinced that this concept is one that you can easily quantify
precisely. Let me give you several reasons why. One is that the
figures of output growth in the recent past that were used to
construct these numbers are themselves subject to a great deal
of revision. What the output gap seems to be in five years' time,
when the ONS have had a mature look at the past and revised the
data—probably quite significantly—will look quite
different from how this so-called output gap seems now. Secondly,
all the estimates of it are based on the view that the growth
rate of productivity follows a completely exogenous path which
is fixed and constant from quarter to quarter. I do not believe
there is any good reason to believe that is necessarily the case.
As we discussed before, productivity growth may well change from
quarter to quarter, and you simply cannot tell the difference
between changes in underlying productivity growth and changes
in capacity utilisation. They are observationally equivalent.
There is no way you can observe an output gap without forming
some completely a priori view about the underlying path
of productivity. Thirdly, we know, and David Walton has talked
a bit about this, that it is quite possible, as we saw in the
past, that higher energy prices may have slowed the growth rates
of supply capacity. So for all those three reasons—and if
you would like a fourth, I would throw in labour migration as
something that makes even the concept somewhat dubious—I
think it is very difficult to put precise estimates on it. It
is a useful shorthand phrase but I am not sure if it amounts to
much more than that.
Q118 Mr Gauke: Accepting that, would
you agree that there does seem to be some sort of divergence between
the approach of the Bank of England on monetary policy and the
Treasury?
Mr King: Since the methods used
to construct estimates of the output gap are different between
the Treasury and many other people estimating it, including some
of the Bank estimates, then the numbers cannot be compared directly.
That is why I think I would be very cautious about just taking
numbers and saying this is the output gap.
Ms Lomax: There is nothing new
about it either. We have often found that what they (the Treasury)
say and what we might have said are not the same.
Q119 Mr Todd: Two of you have touched
on migrant labour as being a significant uncertainty in this.
When we questioned you before, Governor, about the role of migrant
labour, you said that it was providing a safety valve for pressure
on the economy which would automatically unwind if the economy
were to weaken, which implies an extraordinarily smooth process
of migrants arriving in this country to take up opportunities
and then departing when those opportunities cease to exist. I
think on reflection you probably would not see it quite as neatly
as that anyway. Presumably, some of this migrant labour will actually
stay here and replace the indigenous labour force who may not
be able to offer the same skills at the competitive rates that
they offer. That is presumably your view.
Mr King: They may or may not.
One thing that is very clear from the views that we hear from
businesses around the country is that they recruit directly in
Eastern Europe, and if the labour market is not as tight and they
do not feel the need for more labour, they will not be out there
recruiting as much. So there is bound to be some offset there.
I am not saying it is one for one, but nevertheless, they are
not the same as people who are born in the UK and feel they have
no easy alternative place to live but here. The numbers moving
in in response to a tight labour market will not move in at quite
the same speed or in the same number when the labour market is
looser. That is all I meant by that. There is certainly some degree
of flexibility.
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