Shanghai Forum 2017 Interview: Sir Christopher PISSARIDES, Regius Professor of Economics, London School of Economics; Nobel Laureate in Economic Sciences 2010
Interviewed by: KIM Jinill, Professor, Department of Economics, Korea University
Date: 27 May 2017
Place: Shanghai, China
Kim Jinill: Thank you for agreeing to this interview. Korea Foundation for Advanced Studies (KFAS) has co-hosted Shanghai Forum with Fudan University since 2005. KFAS is a non-profit foundation that provides scholarship programs, academic exchange and support programs, as well as research funding to institutions in Asia including China. This interview will be shared with all of our fellows and partners in various countries.
You won the 2010 Nobel Prize for your work on the economics of unemployment, especially job flows and the effects of being unemployed. What motivated you to start this lifelong research on labor market? And what do you hope that others will see as your legacy?
Christopher Pissarides: People who haven’t studied economics in detail often say: How could a booming economy—one that is growing fast and producing so many things—still have a fraction of the labor force (5 to 10% in normal times) that does not have jobs? Unemployment is a cause for unhappiness. So, what’s causing this problem? Why does it fluctuate? When I was doing my graduate study in London in the early 1970s, I wanted to try to understand what economics has to teach us about this problem.
I looked at the theories about unemployment, mainly associated with the work of John Maynard Keynes—whom I admire enormously—but his theories couldn’t quite explain what was happening at that time. Why was unemployment going up? Why wasn’t it responding to government policy? So, I thought that it obviously needed fundamental rethinking. I started that with my PhD thesis and, little by little, I’ve been improving it and stripping it down to the essential contributions.
Then, I came up about ten years later with a view of unemployment that was workable in that it could incorporate all of the main influences like the effects of unemployment benefits on workers, why productivity shocks of the kind we’d observed in the 1970s were influenced, and why the old Keynesian factors are still there. That is what I would like my legacy to be in.
Kim: Unemployment rates in some developed countries including the U.S., U.K. and France have hit record lows, but The Guardian recently reported that the British people are actually feeling worse off because wages haven’t increased. In the U.S., Bloomberg Businessweek also reported on this situation describing that “the U.S. economy is behaving mysteriously.” Commentators even depict this recovery from the great recession as job-filled non-recovery to compare with jobless recovery in the early 2000s. What do you think are some possible explanation?
Pissarides: A lot of the recent recovery has to do with the new technology that we’ve introduced. The new technology is based on the Internet, artificial intelligence, and computerization. This technology benefits highly skilled workers because they are the ones that are complimentary to the technology.
You should have a mechanism by which gains from productivity from the computer users can be distributed more evenly across the labor force. Some countries have succeeded in introducing such mechanisms like Sweden, Norway, and Denmark. Other countries have failed like the U.S. and U.K., and France has tried but not very well and now there is some hope that the new regime will do it. Unfortunately, it’s not one area where the European Union has taken the initiative although they could have done it. I was hoping that they would to give some solidarity within the Eurozone.
The unemployment figure for the United States looks good but if you go behind the figure, you find that many prime-age men are without a job but not being listed as unemployed. If you bring those men in, the unemployment figure is not going to be good. A number of factors contribute to the non-employment of those people.
Obviously, there are those released from prison and drug abusers. Even though you have recovered, you are not able to go straight back into the labor force and there might be discrimination against you even if you tried. You may have lost the work ethic. After your sentence, you may need a training program or some assistance but they are not offered in the United States.
Another factor might be that people get disillusioned with the labor market and drop out completely, simply wasting time away. Those people should really be counted as non-employed/unemployed. In the U.K., we don’t have this problem.
The feature of the U.K. is that a lot of the jobs are “zero-hour contracts”—making it a gig economy—that are not regular full-time jobs that would lead to a career. So these jobs have a high turnover. Even though the preference would be for regular full-time permanent jobs, if you cannot get them, it is better to have a temporary job than none. So the picture is not as rosy as it looks. I do expect it, unfortunately, to worsen due to uncertainties of Brexit hitting the labor market.
Kim: Globally, chronic youth unemployment is a huge challenge for policymakers, business leaders, and academics. The failure to give young people jobs is a worrisome element of social instability in addition to unemployment itself. Experts have warned that we now have a “scarred” or “lost” generation in the world economy. Do you think there is an effective solution to systematically decrease youth unemployment rates?
Pissarides: First, I have to say that—with the exception of countries like Greece and, to an extent, Spain—I don’t think there is a lost generation because of youth unemployment in Europe, North America, or the fast-growing Asian countries including Korea and China.
Youth unemployment is always higher than other kinds of unemployment. Across OECD, youth unemployment is about twice as high as adult unemployment and there are very good reasons for that: The young people haven’t quite found their niche in the labor market yet; they are job-shopping; they try to see which career they like best; they don’t have experience in job search because they just came out from schools’ and they are starting from the beginning.
To some extent, it is advantageous to have high youth unemployment on the assumption that the young unemployed are exploring their options in the labor market. We all know young people who’ve just come out of university of school that have applied to a number of places but mainly received rejections. They may still have one or two options but they are considering them and thinking whether they should reapply or not. That’s a very correct logical way of going about the labor market. It’s how you deal with the frictions and imperfections of the labor market. When you’re a young person, the state of unemployment is not as objectionable as when you’re in your thirties or forties, have a family and so on.
It’s very difficult to measure how much that additional unemployment should be. In my view—without very accurate statistics because it’s not possible to get them—youth unemployment being something like up to twice as high as other adult unemployment doesn’t seem too crazy.
The question is the level of overall unemployment for a country. If the overall unemployment is 5% and the youth unemployment is 10%, I don’t think there is any big problem. But if a country has 10-15% unemployment and the youth unemployment is 30%, then you really get into problems. You need government intervention.
Greece has something like 25% adult unemployment and 50% youth unemployment. That means half of the young people are out of work.
Kim: You have expressed your support for the idea of a universal basic income, as you mentioned this morning. Switzerland, however, recently proposed a monthly basic income of 2,500 Swiss francs (about USD 1,700) for adults and 625 francs for children, which led to a referendum but 77% of its citizens voted against the proposal. Could you talk about your reasons for advocating the universal basic income, and about your explanations for the Swiss voting out the proposal?
Pissarides: The idea of a universal basic income is that instead of looking at the individual cases and people’s individual needs, you follow social policy which ensures that everyone is above the poverty line. Then you obviously have to finance that out of taxation because it is an ongoing situation.
You have to make sure that is not being taken advantage of with people or families that sit back and say “This income is enough to keep me going so why should I bother with work?” You have to structure it so there are sanctions but the principle is there. If you are found to be abusing the principle, then you are sanctioned and maybe it’s taken away from you or reduced.
I would like to think that the model of unemployment we developed and the model of incentives in the labor market give you a nice framework to calculate. You can calculate and decide on the sanctions but the main issue is that you don’t look at individual cases. You don’t interview, question people before they can make a claim, or leave things at the discretion of officers. You have a universal policy that is understood by everyone.
Why do people reject it? Most of the voters in any country will never have a need for universal basic income but they would have to pay taxes to finance it. People vote in the way that will benefit them, not cost them money.
Kim: President Trump’s Russian scandal has had an immediate impact on the U.S. economy. The U.S. dollar dropped and stock markets sort of crashed. Mounting political difficulties are raising doubts about his ability to push through the proposed tax cuts and infrastructure spending. There are few mainstream economists among President Trump’s economic advisers. How concerned should we be about his economic policy agenda? How profoundly will it affect the U.S. and the world financial markets including the U.K.?
Pissarides: I think we should be very concerned about Trump’s economic agenda because—to put it bluntly—it’s in shambles. He’s doing one thing here, one thing there. There is no coherent policy to approach the overall economy of the United States and its relations with foreign countries. He looks at the Trans-Pacific Partnership and says they’re going to withdraw from that. He looks at the Atlantic treaties and says they’re going to withdraw. He looks at China; at first, he makes hostile statements and then friendly ones. He says he has no relations with Russia and then maybe he has but so what… We just don’t know—the financial markets don’t know—where he stands.
Before the election, we said there would be a lot of uncertainties if he became elected but there was hope that even if there are problems, economic advisors would point them out and make them self-contained. But I doubt that he talks to these economic advisors. It’s not surprising the financial markets are responding with volatility.
Kim: Turning to Europe, the process of Brexit has taken place with a bit more certainty while France has just elected its new president; both of which experts say has helped deliver a further boost to already high consumer confidence in the Eurozone. What do think Emmanuel Macron means for Brexit and the European Union? Do you see Brexit and the victory of Macron as opportunities to reform Europe?
Pissarides: It’s interesting the two events happened in the same year because one is one of the worst things that could happen to the European Union with Britain being the leading country, and the other is one of the best things that could happen—a pro-Eurozone president was elected in France.
Traditionally, European Union was driven by a Franco-German alliance. Under Hollande, France basically withdrew from that and left everything in the hands of the Germans—Merkel and Schäube, her finance minister, in particular. I don’t think they’re good for Europe even though they say in their defense that they’ve managed to steer Europe through this crisis as a united Europe. It’s not a united Europe in a way it was before when both France and Germany were guiding it.
Macron’s election—given what he said during campaign and what he did before as a minister—is very encouraging, especially with the southern countries that have many of the problems that France has.
Hopefully, the Eurozone would not have to go through a completely German-led policy about structural reform. It was pointed out that policies followed in the Eurozone are essentially policies designed and promoted by the German finance ministry and have not been good for other countries such as Spain.
I’m optimistic of the Eurozone with Macron in France and whoever gets elected in Germany. Of course, the Social Democrats would like it to be much more pro-European but even Macron and Merkel should be better.
On the Brexit side, I don’t really expect but hope Britain will stay as close to the European Union as possible.
Kim: Let’s go onto my country for a second. South Korea has also just elected its new president. The newly elected president, Mr. Moon Jae-in, has vowed to create 810,000 new jobs in the public sector and reduce the number of contract workers—like the UK’s gig workers who do not have benefits—to zero at public institutions at least. What do you think are some opportunities and challenges in this policy to transform gig jobs to regular jobs? What are your advices to President Moon?
Pissarides: When it comes to public sectors, the situation is different. For the public sectors, I do support it even if it means a fewer number of jobs. Companies that get funding from the public sector should involve some training as well and full-time, career jobs so people either stay in the public sector and pursue a career or when they move outside, they move with some additional knowledge. I would not object to using tax revenue to subsidize the training. Even for private sectors, I would not object but it’s more difficult to make sure it’s not being taken advantage of.
Without knowing too much about the policy of the administration in Korea, I have come across before this idea that the government will create so many jobs and you can judge them. I think that’s the wrong approach to labor market by the government. The government should be saying we are going to create the right conditions for job creation in our economy, and we are going to encourage the market economy and private enterprises to created good full-time jobs involving career prospects and training rather than gig-type jobs. The government should create the framework for doing that, not the jobs themselves.
South Korea has achieved tremendous things by the private sector, not by the public sector. You should look back to what brought you success and continue along those lines.
Kim: Before I close the interview, let me ask the following question since many of the readers will be economists. Your research on the labor market dynamics has been done through an angle of search and matching. Another area where such a theory is popular is the theory of money. What do you think is common between the two goods—labor and money—that calls for a micro-founded theory of the search-and-matching framework?
Pissarides: It’s basically down to how much information you have about the transaction. In labor markets, the information you don’t have is the quality of the person as a worker. Because your labor is embodied in you and you spend most of your working day at the place of work, your personality and character affect your productivity as well. As you’re training, just showing a certificate of training is not enough. And the reason there is search and match is basically you’re looking for that type of job that can fit in well with you and can match.
In finance, the imperfect information is about the qualities of the project, the prospects, and different views that different people have about the financial product. It’s a very similar search mechanism: One is your own character and the other one is the nature of the product.
Kim: This is the last question. Would you like to send a brief message to Shanghai Forum’s audience?
Pissarides: I am very pleased to be here in Shanghai with you. I hope you’ve had very productive couple of days. You have very good speakers in your program from the work that I have seen and very good discussions. Forums of this kind are essential in exchanging ideas and bringing people from different countries, different cultures, and different types of economists together so that we can see best practice and apply in our economies. Hopefully everyone is here with an open mind and we leave wiser than when we arrived.
Kim: Thank you.