LONDON – The labor market is “worse than the 1970s,” with massive rail strikes in the U.K. offering a sign of things to come, according to Nobel Prize-winning economist Christopher Pissarides.
Britain’s RMT Union confirmed Monday that planned railway strikes will go ahead this week after talks with train companies failed to reach an agreement over jobs, pay and conditions. Around four-fifths of trains are cancelled, with further strikes planned later this month and in July.
Pissarides, Regius professor of economics at the London School of Economics, told CNBC on Tuesday that labor markets are going through “some of the most difficult periods” he had seen.
“It’s even worse than the 1970s, in the sense that we need to make bigger adjustments in labor markets. We have new technologies bringing on automation and, in fact, the trade union leaders are complaining about job losses, about ticket offices – that’s due to the new technologies,” he said.
What’s more, economies around the world are facing soaring inflation, particularly when it comes to food and energy, in large part due to the war in Ukraine. Pissarides said there is “no way we can avoid the pain from that,” and that the British government therefore faces the challenge of trying to distribute that pain throughout the economy.
“There aren’t many sectors of the economy which have strong unions. We don’t have big nationalized industries like we had in the ’70s when the whole of manufacturing was going on strike, and therefore that makes it very difficult to say: ‘Those of you who have strong unions, we’re going to give you full compensation for these external shocks, and let the others bear all the burden’,” Pissarides explained.
‘Domestically manufactured’ inflation
Along with the external shocks facing the whole of the global economy, the U.K. is also dealing with what Pissarides termed “domestically manufactured” inflation, after the government’s furlough scheme and other fiscal support programs propped up demand throughout the pandemic, but drove public debt to record highs.
Global government debt is expected to soar to a record in 2022 as borrowing also remains broadly elevated.
Pissarides, who won the Nobel Prize for economics for his work analyzing job markets, suggested uncertainty about the extent to which the internal and external shocks were driving inflation was driving divergence among Bank of England policymakers, who voted 6-3 in favor of a 25 basis point rise to interest rates last week.
“Some members thought we should tighten more, others thought recession is coming anyway so demand would fall and wages would not need to rise, so it is a very difficult time and I’m not surprised that we hear these contradictory things coming from different parts of the government, from the Bank of England, from the workers,” he said.
A key concern in the long run, Pissarides said, was the “second-round effects” that are beginning to take shape, with inflation expectations becoming de-anchored and leading to wage rises, forming a “self-fulfilling prophecy” and an upward spiral for inflation.
“The spiral is not quite there yet, but giving pay rises that match or are close to matching the inflation that the Bank of England is forecasting will get us very close to a spiral, and we might see it, and if that happens, it’s going to take much longer to get rid of inflation,” he said.
“Remember in the ’70s it took at least 10 years to get inflation and it was very tough in the end, it was the Thatcher policy that caused so much unemployment just fighting inflation. That’s certainly not something that we want to see this time because we’ve learnt our lesson hopefully.”