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

This is an excerpt from an article published in the Financial Times on 14 June 2022, in which Economics correspondent, Delphine Strauss, speaks with Sir Christopher Pissarides as part of the ‘Economists Exchange’ series. Read the full interview.

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.
https://www.ft.com/content/86aba26c-f4ed-4e8b-90cc-8b6b90309
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.

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: 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: 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 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.

This is an excerpt from an article published in the Financial Times on 14 June 2022, in which Economics correspondent, Delphine Strauss, speaks with Sir Christopher Pissarides as part of the ‘Economists Exchange’ series. Read the full interview.