Christopher Pissarides: ‘Debt and inflation could see us lose control’


This is part of a series, ‘Economists Exchange’, featuring conversations between top FT commentators and leading economists

In the UK, unemployment is at its lowest for almost half a century, but large numbers of people have chosen to drop out of the workforce. In the eurozone, the jobless rate is the lowest since the creation of the single currency. In the US, acute labour shortages have created a jobseekers’ market — although wages are still lagging behind inflation.

The problems in labour markets look very different from when Christopher Pissarides, regius professor of economics at the LSE and a former adviser to the Cypriot and Greek governments, began his academic career in the 1970s — a time when governments were struggling to get to grips with a new era of mass unemployment.

But for Pissarides — who won a Nobel Prize in 2010 for his work on friction in labour markets — many of the answers are similar.

Then, he argued that unemployment could not be solved by macroeconomic stimulus, because it was partly due to mismatches between the jobs and the skills of the workers available. Now, he contends that policymakers need to rid themselves of the urge to tackle social problems through monetary and fiscal stimulus that will fuel inflation but not bring any fundamental shift in workers’ bargaining power.

Discussing the new review he is leading, of automation and the future of work in the UK, he argues that the remedies for regional inequality will instead lie in upskilling people for new roles, and using the flexibilities afforded by remote working to help older workers remain in the workforce or re-enter it.

Delphine Strauss: Chris, what differences do you see between this recovery and the last one, after 2008? It seems as if in the aftermath of the financial crisis we had a different problem, with very persistent unemployment in the eurozone, and then a big rise in low quality work and insecurity in the US and the UK. How do you think the Covid crisis has changed the nature of the challenge?

Christopher Pissarides: It’s a completely different kind of recovery we’re facing now. Not only because of Covid, but also because it has coincided with the war in Ukraine and what’s happening to prices of materials. In 2008, the recession was focused on the financial sector, and the main spillover from there was in construction or housing . . . Once you brought [those two sectors] under control . . . then recovery was going to come on its own, as it did.

I do think there were mistakes made, like the debt-reduction policies of George Osborne [then UK chancellor]. Of course, I believe it was a big mistake. It’s the first thing where I appeared in the press with headlines — saying Britain’s new Nobel laureate says it’s a mistake, the sovereign risk is not going to be so high as to warrant this kind of policy. That’s what slowed down the recovery, rather than the economy itself. Very importantly, there was no inflation at the time. So, we could use these expansionary monetary policies as we wanted, to get us out of the recession and there were no inflationary risks.

Now, we’re running into the problem that there is a lot more debt. So, some debt reduction might be justified before it gets out of control — although, until recently, I thought that it wasn’t justified yet. Coinciding with the rise in energy prices and those spreading out into the economy, and with the huge expansion of furlough schemes and other things during the pandemic internationally, that created a situation where we might be running risks that would get out of control. The debt situation — debt and inflation combined — could see us lose control in macro management and not be able to bring the economy under control quickly enough.

On top of that, technological changes are taking place. They were happening independently in the economy because of automation, robotics and so on, but Covid brought new technological changes. Couple that with China being the main trading partner of the UK, outside Europe, and going into lockdown seemingly forever, and what’s happening with energy supplies and in other supply chains. There are so many things taking place simultaneously that it’s really a very, very difficult job, knowing how to co-ordinate policy and how to control the economy so as to bring a recovery that is quick enough and without big costs, especially for those on lower incomes and for the inequality we’ve been observing across Britain.

DS: Do you think it’s still possible for policymakers to seek to tackle social problems by running the economy hot? Or is the idea of running a high-pressure economy not realistic any more?

CP: The problem with running the economy hot to deal with such problems is that it might bring even more inflation. That will affect the very people you are trying to help. The only solution I see is something similar to the furlough policy, but addressed to people in work on low incomes — because you have this double whammy of [inflation] and new technologies, which are hitting mainly low incomes and unskilled jobs. That’s the section of the economy that needs a little help, but it doesn’t need fiscal policy — general macro fiscal policy type of help — because inflation is a real constraint.

DS: Is automation still the biggest threat for low-income workers or are we coming into a situation where labour shortages mean it’s a benign phenomenon?

CP: I think we’re reaching a point where companies will automate because of the shortages of labour. I know agriculture is a small sector, but a lot of the seasonal agricultural labour in the UK was immigrant labour, which is a lot more difficult now . . . No one would blame a company that relies on that type of work for automating.

I don’t think it’s a risk if other measures are put in place at the same time — upskilling and the transition to new types of jobs where there are labour shortages. The skills required in the new jobs are different from the ones that automation technologies have taken over. They may be a bit more technical. They will rely more on social interaction, as in the hospitality industry and in health and care . . . But they require training. There are also jobs where there are a lot of traditionally gendered differences that it might take time to get rid of.

Those things are problems that need to be tackled, but if they are tackled correctly, automation will be a welcome aspect of how we run the labour market. Productivity will go up and there is no reason why we should have the inequalities that we have, because the new jobs will be more highly skilled.

You might ask, how can we provide that kind of help? I think that’s where government comes in. If it’s going to find money to support the labour market, that’s where it should be directed — to upskilling, providing information about the transition into new types of jobs and giving subsidies to companies that train.

DS: In the US and UK, we have very low unemployment alongside very high vacancies and lower participation. What should governments be doing to boost employment?

CP: Through training programmes and the other issues about how you identify with new types of jobs . . . a publicity campaign that these jobs pay well and so on. Then there will be more participation. Especially from women and older workers, because although participation of over-65s is increasing, it’s still way down if you compare it with healthy life expectancies. That would rise if there were more flexible types of arrangements at work. Then, that could be combined with more automation at the lower, unskilled end of the market.

DS: If labour shortages are going to be endemic for a while, do you think we will get a real shift in workers’ bargaining power and ability to get the terms they want?

CP: Well, on the one hand, you might think we will because there is unusually high demand for labour, given the conditions. But on the other hand, workers do feel a lot more threatened by new technologies and all these unanticipated shocks — Covid, war in Europe. So, I don’t see them, or their unions, being aggressive in pushing for wage rises without worrying about jobs. That mentality, I think, is past.

I do see market forces pushing in that direction, because employers who think they have good business and cannot find workers might be raising wages. But again, that would depend very much on whether the training programmes are in place and whether the transitions workers would be making are feasible.

DS: Do you see any reason to think that the longer-term trend of slower productivity growth will change, post-Covid — and what would that mean for monetary policy?

CP: It’s certainly not in the statistics as yet, but you would think that if we played the automation possibilities and new technologies well, there would be some [pick-up], at least in manufacturing and sectors such as finance. But somehow, you don’t see it happening in Britain as much as in Germany, for example, or in France or some of the smaller countries like Sweden, or outside Europe, Japan.

Internationally . . . we have to be realistic about monetary policy. We had near zero interest rates for so long that we think that’s the norm but it’s not. Capital has a rate of return — that’s what induces investment. That rate of return should be reflected in the central bank’s interest rate policy. In a sense, it was unusual circumstances that put interest rates so low.

Here [in the UK], with 1 per cent interest rate from the central bank, we panicked as if to say, “Oh my god, stagflation is coming. We’ve had it. What are we going to do?” But 1 per cent is still below what you might consider to be a long-run equilibrium.

DS: So is the new, post-Covid normality going to look more like the old normality?

CP: I think so, yes. With more capital and better quality capital, more automation and, I hope, more flexibility in labour markets in terms of jobs, working hours, working from home. New forms of training programmes, rethinking the education system to provide better digital-type education. Facilities to make it easier for older people to participate, which would involve . . . flexibility on hours of work, because we do know that older people are bigger users of health services, for example. If you work from nine to five every day, that becomes difficult but if there’s more flexibility on how you adjust your hours, even if they are close to 35 a week or whatever full-time is, then, more of them will come out into the market.

DS: You’ve said recently that people’s experience of work is very much defined by place. Would that remain true if we do have a higher degree of remote working and movement away from urban centres?

CP: That is one of the central themes of the project that the Nuffield Foundation is funding us to research at the Institute for the Future of Work. I’m in two minds about it. There is no doubt that if you are in an area of the country where there are many different types of jobs, you will have a higher rate of return to your experience than if you are elsewhere.

I’ve been involved in various studies that show the biggest gains from experience are in places where there are the benefits of being close to other economic actors and spillovers from one job to another. It gives you the possibility of changing jobs, or if your employer doesn’t want to lose you when there’s an alternative, they are more likely to provide good training and make your experience more rewarding.

DS: What kinds of places would those be?

CP: London is number one here. In France, it’s Paris. The US has more, because of its size — New York, Los Angeles, San Francisco, even Texas, Houston and, of course, Boston — the Massachusetts area. But in Britain, there is hardly anything outside the London area and the surrounding sphere of influence. France is exactly the same — Paris and the surrounding area is completely dominant.

Now, the really difficult question is, given the new technologies we have and if we do go for more flexibility in work, whether these benefits could also be achieved elsewhere. I would hope so. We know from economic geography that you need concentration — even in the US. But do you really need only one big urban centre? The answer is obviously no. In the UK, Manchester, Liverpool, Birmingham, Coventry, Wolverhampton, Newcastle, Sunderland could be urban centres that benefit those living in the surrounding area and where people work remotely with the other big centres.

That’s what we are working on. I hope it can be achieved. In principle, there is no reason why we shouldn’t have, say, three or four urban centres instead of one. That will enable people to stay there rather than be forced to migrate to enjoy more successful careers.

DS: What are you hoping to find out from the review?

CP: Why there are such big gaps in productivity and generally in the types of jobs that are being created in different areas of the country. Our preliminary findings and thinking is that that’s partly due to the different skills and types of labour available across Britain. That’s only to some extent due to migration.

There are also areas where you don’t have the mentality that education is good and let’s get more education. One of the findings of intergenerational research is that what your parents did is a very strong influence. In areas where parents used to leave school at 16 and go into manufacturing, coal mining, shipbuilding and so on, that’s transmitted to the next generation.

So, that’s a big constraint. Then, there is the migration of university graduates, sizeable fractions leaving some areas. Obviously, London and the south-east is the biggest attraction for them.

Then, the other aspect, which we haven’t fully investigated yet, is why are employers not adopting the latest technology in some places? Why are there so many more unicorns in the south-east than in the Manchester area, for example? We’re trying to find out by collecting our own data.

DS: Beyond the UK, one of the really striking things about the labour market recovery has been just how good things look in the eurozone, where unemployment is the lowest it’s been since the euro was created. What’s your view on that and what should be done to make the most of it?

CP: The eurozone is more flexible on the labour market because it still has a big supply of more reasonably priced labour [from eastern Europe] and there are still big numbers underemployed in their own countries or in certain jobs. Female employment rates in southern Europe are still very low and with the rise in education standards, they will increase. Altogether, the fundamentals, if you like, of the labour market in the eurozone are a lot better than almost anywhere else in the advanced world.

The problems the eurozone had in the past had to do more with monetary union and whether one rate of exchange was good for all the countries. But the adjustment seems to have taken place. I chaired a committee that prepared a report for the Greek government, which looked at these things in great detail and the exchange rates and financial matters were not really constraints. The constraints were more like the integration of the public sector in the regulation and openness of the professions — the old, traditional market rigidity of southern Europe.

Gradually, those have been reformed. Spain was a leader in that reform, Italy under Mario Draghi is doing it, Greece is doing it now. When you see all those things taking place with the European Central Bank having put the financial side under control, then there are better prospects for the eurozone.

The above transcript has been edited for brevity and clarity

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