Examination of Witness (Questions 20-39)|
24 MAY 2006
Q20 Mr Fallon: You said the Bank
was picking up the cost of your flights; are they also picking
up the cost of your hotels when you are here?
Professor Blanchflower: They are,
but that is taxable and obviously I am paying tax on that.
Q21 Mr Fallon: I understand that.
My question is, if you are not a home-owner here and you are not
renting a property here, is it right that you are setting mortgage
rates, effectively, for my constituents, not bearing those housing
Professor Blanchflower: I think
the question the Chairman raised was that the nature of this appointment
has to do with competence and independence and I hope to be able
to persuade you that I have a strong background, am highly competent
in the fields in which I work and that I am independent. I think
your constituents would want to have the best person, if you like,
someone capable, to do that job.
Q22 Mr Fallon: Obviously you have
followed interest rate decisions here recently, from the MPC;
there was a three-way split last time. Which way would you have
Professor Blanchflower: Actually
I attended the pre-MPC for that meeting. I heard some of the discussions.
I think the way that I would say it is, to make these decisions
you need to look down the microscope. I have not done that, I
was there for only two hours, for the first meeting, so at this
point I do not think I could say where I would go. I am a very
strong data reader and I think it is a judgment call, so I think
you need to look at the data, and I saw some of it, and I think
you need to hear the discussion from other members. I heard none
of those so I am going to keep an open mind on it. You could see
arguments in all directions, I could say that, but I think it
would be foolish of me to say what I would have done, as I had
not heard the discussion.
Q23 Mr Fallon: Fair enough, but the
current debate seems to be about the size of the output gap, seems
to be the argument. What is your view of the size of the current
output gap in the United Kingdom?
Professor Blanchflower: I guess
there is one way to think of things, as an output gap; as a labour
economist, you might think an alternative is the unemployment
gap. I tend to think more like that, they sit reasonably together.
There does not seem to be large evidence that there are substantial
gaps. My view is that at the moment there are some series which
point in a direction of change. For an empirical person like me,
it is really the question is this cycle or is this trend, and
I think the answer is it is too early to tell, I have not had
the full discussion with the Bank. There are some worrying things
going on, but a blip or a couple of data points do not make a
trend, and the question is, is it going to. Obviously, some of
the issues have to do with oil prices and we are going to have
to see how this feeds through, but at the moment I think we have
to wait and see, with the data; that is my position.
Q24 Mr Fallon: You are replacing
Professor Nickell, who was also a labour market specialist, and
it was his belief that the rise in unemployment had created the
extra slack which would dampen down inflation. Do you agree with
Professor Blanchflower: At this
moment, I am not persuaded one way or the other. I know Steve
has taken that position. Steve is very eminent. I have spent 25
years as a colleague of his and heard his discussions. I am going
to wait and see, at this moment. I think, again, there are still
some more arguments that I need to hear. There is some evidence
in that direction but there is counter evidence as well; so I
think you would say, yes, there is some evidence of spare capacity,
but David Walton has made the point that there are other pieces
of evidence too. I think it is a time really to be cautious, look
at the data, be briefed by the Bank and try to make an independent
decision, and not prejudge the question.
Q25 Mr Fallon: Fair enough; but your
position at the moment, therefore, is that you are not convinced
there is sufficient extra slack in the economy to dampen down
inflation. Would that be a summary?
Professor Blanchflower: No, I
did not say that. I said that there are moves in a number of directions.
I do not think I have been briefed sufficiently to know the right
response to that. The trends have been flat and expectations seem
to have been nice and constant, but now there are some fluctuations
going on, we need to understand the source of them and quite what
is going on. I do not understand that yet, but I think I am going
to have to and I want to.
Q26 Peter Viggers: When the concept
of a single European currency was first mooted, later known as
the euro, what was your view of the concept and how has your view
evolved, if it has?
Professor Blanchflower: It is
a very good question. Obviously, there was a strong debate about
whether one should join the euro. I was not really party to that
debate. I am not an expert on those kinds of areas. I do not have
a strong view really. Maybe I should have had one. I am not an
expert there; really I have not had a strong view about it, I
Q27 Peter Viggers: It is one of the
biggest single decisions in the field of economic activity.
Professor Blanchflower: My expertise
has been broad-ranging; it has not been in that area, I am afraid.
Q28 Peter Viggers: How do you view
the differences in interest rates between the UK, the European
Central Bank, the dollar, the yen; how does the UK fit into the
international pattern of interest rates, how much do they interrelate?
Professor Blanchflower: Obviously,
living in America, I have been watching the changes in interest
rates. First of all, I experienced for quite a while quite a significant
difference between the interest rates in the US and those in the
UK. Obviously I am intrigued and interested in how these two things
impact together. The piece of evidence that you see, I think,
in the US has been very strongevidence of significant changes
and also, at the same time, a change in the Chairman of the Fedso
I think you have seen some degree of instability in the markets
and some concern about what is going on, more instability in the
US than you see in the UK. How those two things impact together
obviously is complicated, but I think we have seen quite a lot
of instability in world markets, partly because of what is happening
in the US. I get the sense, from living in the US, that the markets
are less clear about what the Fed is going to do. The latest inflation
numbers in the last few days seem a little worrying and it appears
that interest rates now are going to rise in the US, but it appeared
perhaps a month or so ago that they were not going to. The question
of how the two sets of things interact together is an open question
which I am going to think more about.
Q29 Peter Viggers: Which are the
areas where you sense the greatest stress? You have mentioned
that the United States possibly has market-led difficulties;
would you identify the United States economy as being one of the
greatest worry areas for you?
Professor Blanchflower: Certainly
the current account deficit in the US of 7%, or so, appears to
be unsustainable. There have been concerns obviously about the
budget deficits that are being run, and certainly the latest numbers
on changes in the CPI seem to be particularly destabilising. My
experience is that, though obviously there are other issues in
the world, but it seems to me that what was going on in the US
in the last three months or so is worrying, in some ways.
Q30 Peter Viggers: What are the factors
which concern you most about stability in the UK economy?
Professor Blanchflower: The best
evidence we have had so far is that this mechanism has worked
very well, this great stability that has gone on, certainly since
2000. I think the question is how well the economy and the mechanisms
are set up to sustain large shocks which potentially will come.
We have seen one oil shock, and it seems to have sustained itself
pretty well; the question is how well are the mechanisms set up
to sustain shocks. Sitting in the US, seeing hurricanes Katrina
and Rita, unpredictable, uncertain events, these things are going
to happen, and events like this are going to happen on my watch.
The stuff I want to think about, what potential shocks might come
and what we might do about them, I am mindful of that and have
started to think about that already.
Q31 Angela Eagle: Your particular
expertise is in the labour market and you say in your application
that the labour market here is historically tight. Do you want
to say just a bit about how you have come to that view?
Professor Blanchflower: I would
say, probably, I am an applied economist with a specialism in
labour markets, because I have written on various areas, you might
think on the edges of labour economics but that is really my particular
expertise. Unemployment has actually trended down significantly,
I think really since about the mid nineties we have seen a strong
trend down. Ex ante I do not think we would have expected
that. Ex post I think we could say probably it has been
driven by changes in productivity; but ex ante I do not
think really we would have known that was going to come. I think
we have seen permanent changes in the equilibrium unemployment
levels and they have remained in the UK, unlike most other places,
they appear to have remained, unemployment remains relatively
constant since 2000 and inflation has remained relatively constant.
It does not look to me that we are very far away from the NAIRU
or the equilibrium rate.
Q32 Angela Eagle: That has actually
gone down over the years, that we have a fuller level of involvement
in the labour market?
Professor Blanchflower: Yes, I
think that is right.
Q33 Angela Eagle: Was that supply
Professor Blanchflower: My judgment
is that it has to do with changes in productivity, potentially
brought by technology. In many senses, it is hard, until it is
finished, actually to realise that has happened. I see it being
quite close to the equilibrium rate. When a series runs along
steady for five years and remains relatively flat and pressures
do not seem to be coming from it, it suggests you are pretty close
to the equilibrium rate. There are lots of ways of calculating
it, but given that they all come out pretty much with the same
answer then you have a flat trend.
Q34 Angela Eagle: Professor Blanchflower,
you have done some interesting work on the wage curve with Andrew
Oswald, which comes up with a conclusion which is opposite to
what the free market, neo-classical approach actually would suggest.
It is very intriguing that the higher the wages the lower the
local unemployment and the lower the wages the higher the local
unemployment. That is an interesting finding, an empirical finding
that you have done, with good, hard, microeconomic analysis, across
12 different countries. What implications do you think that has
for approaches to wages policy here, and particularly can you
say something in terms of skills and upskilling?
Professor Blanchflower: There
are lots of parts to the question; let me try to take them through,
and I will try not to forget this skill part. The work we have
done on the wage curve, which has gone back now for nearly 15
years, started out in the UK, went eventually to the US and we
have done work on a dozen or so countries. The wage curve now
appears to exist in over 40 countries and, what is interesting,
there is not a single country, where it has been tested, that
it does not appear. Some people think of it as a piece of evidence
in search of an explanation; its constancy is something that we
have remarked on and it does not seem to be reasonably explainable
by market competitive models. It has implications I think
for the transmission mechanism from unemployment to wage inflation
and we argue that some of the transmission mechanisms are less
than other people think; so this is obviously testable. In some
sense, our specifications say a tightening of the labour market
feeds through less to inflation than perhaps other people in the
past had thought. This is obviously directly relevant to the kinds
of things that happen here; some of it we do not understand but
I am working on that.
Q35 Angela Eagle: It is interesting,
because the caricature of the American labour market is that because
there is virtually no regulation there is mass creation of jobs
at very low wages. The wage curve would tend to suggest, at least
in one segment of the labour market, that is not true?
Professor Blanchflower: The surprise,
first of all, that I would have predicted when I started this
work, because we started out to get a wage flexibility index,
was that you would get something very different in the US than
you get in the UK; you do not. However, in the disaggregated sense,
you do get some differences. I think the implications of it are
hard to draw, but this is ongoing work, I think important work,
that we have documented. It does appear that the wage curve is
that there is more flexibility, more responses to wages for least-skilled
workers than there are for higher-skilled workers. In some sense,
our idea is to try to think about wage flexibility of countries,
wage flexibility of areas, but in some sense this is filling in
the pieces of how the labour market works. We do not have the
answers but many people think this is a significant step forward.
Q36 Angela Eagle: And the implications
Professor Blanchflower: I think,
potentially, there are.
Chairman: Forgive me, but we are moving
on from that.
Q37 Mr Todd: To what extent does
migration play a part in this analysis as well? You will be aware
that the UK has, by European standards, a relatively free market
in labour, with migration relatively easy to achieve, and of course
you work in a country where, to a greater or lesser extent, there
is a similar approach. To what extent does that affect the inflationary
expectations and wage patterns?
Professor Blanchflower: It is
a very good question, in fact, exactly something that I am working
on at the moment. Some of the issues that we are dealing with
obviously have to do with flexibility of labour markets, the interaction
between migration, housing markets and labour markets, so we are
working on exactly these kinds of pressures, and particularly
to what extent do the housing markets make labour markets less
flexible. Also we are working on the mobility of workers, how
the mobility of workers impacts on how an economy works, on wage
inflation, and so on. Part of that has to do with migration of
workers within a country, because that is particularly relevant
in the US, people argue that it has to do with, much of the benefit
of the US is, if you like, migration across areas, and part of
the work has to do with migration into a country from abroad,
so I am actually working on the implications of migration into
the UK. Part of the work that we have done as well has to do with
immigrants into the US and particularly the movement of illegal
immigrants into the US. It sounds a strange connection but a lot
of the work I have done on Chicago relates to immigrants
and illegal immigrants, because in the early years the immigrants
came into the US and went to California and to Arizona and to
New Mexico, but in recent times we have seen them spreading out.
Since 1990, a million Mexicans arrived in Chicago, so some of
the work that I have been doing there relates to how migrants
come in, the mobility of labour, how that impacts on wage pressures,
and so on. I have been working on these; these are very big questions
but the Bank is interested in them and I have been working on
them both in the UK and in the US and it is a huge area.
Q38 Mr Todd: Our questioning of both
MPC members and Bank officials revealed a perhaps surprising level
of ignorance about the impacts of inward migration into the UK
and the UK economy as a whole, and that included obviously `on
demand' patterns because that is a function of "Well, these
people arrive and they don't just provide labour they buy
things too." You have a substantial contribution to make
in that particular area perhaps?
Professor Blanchflower: I think
I do, actually. Part of it is to do with the work that I have
been doing in some of the places in the United States, as I say,
particularly in Chicago. I am aware of and have been involved
in a lot in the discussions about the impact of immigration into
the US, things like the Mariel boat lift, what did that do to
particular labour markets. Actually I have been well-versed in
those kinds of issues in the US and I am starting to work now,
I have talked to the Governor, I want to work on those issues
here and that is one of the things I am going to work on.
Q39 Mr Todd: You did touch on, in
the previous line of questioning, to Angela, the issue of skills
but then did not actually return to it, the importance of that
dimension within the labour markets and the meaning of that in
terms of inflationary impacts and wage expectations. What research
have you done in that area?
Professor Blanchflower: The area
of skills shortage is an important one. I think it goes back to
some of the earlier questions about regional considerations. If
250,000 migrants went to a particular place where there was a
shortage of labour, that was going to have a rather different
impact than if they went to a place where there were fewer shortages.
I think the question of how these migrants have moved, how they
impact particular groups and how the labour market impacts different
groups is the benefit of someone like me; that is what I do. My
expertise at the micro level has to do with, instead of thinking
about the aggregate issues, going to the lower level and thinking
about skilled groups and less-skilled groups.