The Interview: From 60s swinger to the Bank's jobs guru

Professor Stephen Nickell, MPC member
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The Independent Online

When the country's acknowledged expert on the labour market says the current rise in wages levels is "nothing startling", it is probably a good idea to pay attention.

"The labour market is quite tight but the question is how tight it can go," Stephen Nickell, one of the nine economists who helps set interest rates every month, says. "It seems to me that despite recent reports, the information we have for January settlements is not particularly startling.

"The Bank collects its own settlements data which is the biggest sample in existence and at the moment that is not showing anything particularly surprisingly strong," he says.

Professor Nickell, a member of the Bank of England's Monetary Policy Committee, is best known within economics for his work in developing the concept of the non-accelerating inflation rate of unemployment (Nairu). Outside economics, he is better known for being an erstwhile friend of Marianne Faithful, Peter Mandelson's maths teacher and a travelling companion of Pink Floyd's Roger Waters. Professor Nickell only took up the dismal science in his mid-20s.

The Nairu says that there is a rate of unemployment that cannot be breached without triggering inflation. Since 1994 unemployment has fallen without sparking any substantial rise in wages, but there appear to be worries in the Bank that this benign relationship could be coming to an end.

So what does the father of the Nairu think? "Unemployment is particularly stable at the moment and there is the issue of how much it can fall and the extent to which firms can attract labour in non-standard ways," he says. "The gain in employment over the last year has not been dramatic relative to the increase in the population. The employment rate has been broadly unchanged."

Professor Nickell, who is approaching his 62nd birthday, is pleased that participation rates among the 55 to 70 age group is rising and that - despite current political noises - immigration is helping to fill labour shortages across the economy.

"I was struck on a recent visit to Northern Ireland that there is a flourishing community of Portuguese there involved in food processing," he says. He is also heartened by the success of a government pilot project to bring disabled people into the workforce that is about to be rolled out across the country.

Professor Nickell is keen to stay out of the political argument between the three main political parties on setting limits on certain types of migrants, but says any government should be clear about the economic consequences. "One could turn around and say that these [companies] will have to pay higher wages and they will pass it on to consumers as higher prices. We would have to pay more for our salmon pieces but it's up to the Government to look at the trade-offs."

But the labour market is only one of the issues that the MPC has to address every month when it sets rates, and every quarter when it puts together its growth and inflation forecasts.

This month's forecasts showed inflation breaking the 2 per cent target but with the balance of risks very much on the downside. A week earlier the MPC had voted to keep rates unchanged at 4.75 per cent.

Since then, however, a number of Mr Nickell's colleagues have dropped hints they are more worried about the upside risks to inflation. The chief economist Charlie Bean warned of a loss of credibility if inflation rose; the deputy governor Rachel Lomax hinted at the need to take pre-emptive action; Kate Barker said rates had not yet peaked; Paul Tucker, who voted for a rate hike this month, sees a neutral rate of interest above 5 per cent.

In contrast Professor Nickell appears unruffled, happy to wait and see how all these conflicting risks and pressures pan out. What concerns him is the risk that household spending could turn out much weaker than either the current situation or the Bank's forecasts.

"If you look at the [forecast] picture you can say that rates go up, then you say 'but what about the uncertainties?' and the key uncertainty is that if consumption growth is seriously slowing down then rates going up would not be a good idea," he says.

He tackles the credibility issue straight on. "I don't think that our credibility is in serious danger," he says. "The danger is in putting rates up and then discovering that household consumption growth is really seriously slowing and then having to put rates down again."

Nor does he agree with Ms Lomax that the Bank's central view is that the current slowdown in retail spending is temporary. "I am not sure it is temporary and in my own view there is a genuine uncertainty. My feeling is that this uncertainty will be resolved relatively quickly, within three or four months."

Nor does he have much truck with a neutral rate of interest. "The notion is not something that interests me very much," he says, adding after a pause: "At all.We set interest rates and it is a sequential process and the question is where are rates now and whether we want to move them today."

The other key issue that interests him is the battle between the rises in input costs such as oil and output prices at the factory gate and the improvements in productivity.

Last month Professor Nickell warned that the era of falling goods prices was probably at an end. "I think that import price inflation will be higher than in the past but that productivity growth in the distribution sector remains relatively strong."

Intriguingly he sees the seeds of an information and computer technology (ICT) revolution in that sector. "There seems to be some dynamism in the distribution sector which is going to continue," he says.

He believes that there is more to come in efficiency terms in areas such as supermarket supply chain management. "There are further opportunities for productivity improvements in distribution ... and that's partly an ICT process," he says.

"There is uncertainty whether we can have the ICT revolution like the US and a lot of people have argued we are overdue for it but I'm relatively sceptical."

After an hour-long, wide-ranging technical discussion of macroeconomics, it was surprising to learn that Professor Nickell was a late convert to economics. After graduating from Cambridge with a maths degree he secured a post at a north London school, where his pupils included a young Peter Mandelson. "He was very bright, but I'm not saying any more.

"I left school teaching because although I was enjoying myself I thought about the idea of 40 more years of this," he recalls. "There was an opportunity to be head of department - there was a shortage even then - and the next step was to be head master and that thought just appalled me.

"I did economics because I had a number of friends who did economics and they told me loads of funny stories because it was real fun in the Sixties - there was open warfare between the Keynesians and those with another view, left-wing and right-wing."

That was 37 years ago and Professor Nickell is now 14 months away from stepping down after a two-term stint on the MPC. At the equivalent point in his first term he insisted he would not serve again "even if asked", but this time he is certain. He becomes warden of Nuffield College, Oxford, in October, a post he will take up full-time at the end of May next year. "Really, really, definitely."

Teacher turned rate-setter

Born: 25 April 1944 in Harrow, north-west London.

Education: Merchant Taylors' School; Pembroke College, Cambridge; London School of Economics.

Career: Teacher at Hendon Country School 1965-68; lecturer, reader, professor at London School of Economics 1970-84; Director, Institute of Economics and Statistics, University of Oxford 1984-98; member of Monetary Policy Committee 2000-present.

Hobbies: Reads novels, plays cricket, enjoys cinema, theatre and opera.

Family: Married with two children.

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