ECONOMY

The politically feasible

Stephen Nickell, a professor at the London School of Economics (LSE) and member of the Bank of England’s monetary board, enjoys a reputation as Britain’s academic heavyweight on employment issues. He was in Athens a few weeks ago and spoke at an event sponsored by LSE’s Hellenic Observatory and EFG Eurobank. Kathimerini interviewed Nickell and agreed to his request to publish the interview three weeks later. What would be your advice to your former student who is now tackling unemployment in Greece? (Nickell helped supervise Economy Minister Giorgos Alogoskoufis’s Ph.D. thesis) Primarily, it’s a question of the politically possible. I think doing your best to raise competition at the product markets is a very good strategy. And another strategy is to try and increase the number of part-time workers. Women, notably, in Greece do not work part time, presumably because of barriers to part-time work. Of course, when I discuss these things, I am not fully aware of the political economy ruling each country, which can make some things difficult and some more difficult in some countries than in other countries. I mean in Italy, for example, two economists who recommended the repeal of one article in employment protection were both assassinated, I think about five years ago. The political economy differs from one country to another and I am not aware enough about the Greek economy to be very specific in recommendations. You mean sufficiently to specify what is political possible… That is the key. I don’t know what is politically possible in Greece. I can only say that if they could increase the product market competition, that would help a lot. But this part-time work is very interesting. I mean in Britain the supermarkets would employ many unskilled workers and nearly all of them work part time. And if you are unskilled woman or man – a woman in particular – if you go to a supermarket, they would say to you, «When would you like to work?» And if you say, «I want to work Friday mornings, Saturday evenings, Sundays after 3 p.m., Mondays after 6 p.m. and no other days,» they will say «Yes, fine.» How is the problem of social security solved for part-time workers? In the UK your social security contributions and rights are proportional to the amount of time you work. So if you worked half time all your life your pension rights will be half of the pension rights of a full-time worker. I understand that you are against collective bargaining pacts. I am against collective bargaining at the level of each individual factory. Collective bargaining factory by factory is not so good. What is required is if you are going to have a widespread collective bargaining system, then the best solution is to have a nationwide system. If you have a nationwide system, the government can say to the unions, «Look, unemployment is high, can you press for lower wages?» And they can say, «Yes.» Whereas if you go to a single factory and say to the people in that factory, «Unemployment is high, can you press for lower wages,» they will say, «If we have lower wages in this factory, it won’t make any difference at all to unemployment, so we won’t.» You have to have coordination. Then the unions are part of the governance of the country. The alternative, of course, is not to have any unions. But that is not option in countries were the unions are part of the national governance system. That’s not an option. I would like to move to something that might look more theoretical. What exactly is unemployment? I mean that in your book Unemployment Crises in the UK (1994) you define it as… Unemployment is not working and looking for work. I don’t mean the statistical definition. I mean the macroeconomic function it has. I understand that you say it is a matter of balancing in the bargaining process between workers and employers. Could you explain a bit in that sense? One way of looking at is to say that what happens in the economy is that workers want a certain level of real wages. Workers don’t control the real wages. They ask for nominal wages given a certain price level. On the other side, firms set prices given the wages they have. So on each side workers want wages given the prices, which means that there is some real wages they are looking for. Firms set prices given the wages, which means that that reduces some real wages that they are prepared to pay. If the real wages the firms are prepared to pay differ from the real wages that the workers want, it is unemployment that makes the workers demand less. That’s one way to see it. So when unemployment is high it means that there is a high gap between how each agent understands its share? Yes. But the important thing to think about is that neither side controls the real wage. Firms set the nominal price given the wages the bargain with the workers. The workers set or try and set the wage they want given the prices set by the firms. So neither side controls the real wage. That’s an outcome in the process. Somewhere in between comes inflation… Inflation is another mechanism for matching the two. So if the workers say for such a price level we want such salaries. But if inflation is going higher than they expect, they may want this real wage but they get a lower one. So inflation is an alternative mechanism for making the two come together. Now the role of monetary policy is to stop inflation making the two come together and make unemployment do it instead. Because the role of monetary policy is to stop inflation from doing it.