Turning Unemployment into Work

For those of you who missed my article in the Irish Mail on Sunday, here is an unedited version.

Update: There is an excellent idea from JK in a comment to this post below as to how we can alleviate some of the adverse effects of the rising unemployment amongst the skilled workers. A must read after you get through my post!

And here are my calculations per unemployment / welfare trap:
Single earner, 1 child, on Euro40,000 pa wage: after-tax income Euro 32,368 pa and leisure time of 4,210 hours pa (8,760 hours in a year, less average hours worked by employed 1,630 pa person in Ireland in 2007 less 2,920 hours of sleep).

Single non-earner, 1 child:

• Child allowance and welfare benefits: Euro 12,636 pa, plus
• Housing allowance / council home: Euro800 pm (average rent Euro840) inclusive of housing-related allowances: Euro 9,600 pa, plus
• Health cards and medical bills assistance for primary care: Euro 1,500pa, plus
• Cost of assisted or foregone child care: Euro 900 pm, or Euro 10,800 pa
• Total: Euro 34,536 pa tax free
• Extra leisure time of 1,630 hours per annum - precious.

Buried deep inside the Quarterly National Household Survey (QNHS), below the
general statistics, there is a set of statistics called Table 16. It may sound dull, but it is vitally important: because Table 16 shows the scale of long-term unemployment in Ireland.

To count as "long-term unemployed", someone must be out of work for one year or more. What statistics cannot tell us, though, is how many people have given up looking for a job completely. From society’s point of view, having been granted a social welfare cheque, they are simply written off – alongside the retired.

What is most worrying though, are the signs of what lies ahead in terms of long-term unemployment.

Firstly, as of November 2008, the number of those in the labour force – i.e. either employed or actively seeking jobs – in Ireland was falling by 0.8% a year. A total of 34,000 outright disillusioned workers have altogether stopped participating in the productive economy.

Second, it is now becoming increasingly clear that much of the recent unemployment is going to become long-term. Between 1997 and 2008, Irish economy generated just 1 full-time job for every 3 part-time jobs that were created. Thus, many jobs created in the late Celtic Tiger era were poor-quality shelf-stacker or supermarket counter jobs: designed to attract less skilled workers (but also ones who are less able to move around in search of work).

It is legally easier and less costly for companies to get rid of part-time workers than full-time employees: so now the part-timers face a much bigger risk of being made redundant. And because they have fewer skills and have been working for a shorter period of time, they are also facing drastically lower prospects of finding a new job. They are the key candidates for becoming long-term unemployed and to eventually drop out of the workforce completely.

Between late 2007 and late 2008, the official long-term unemployment rate increased from 1.2% to 1.8% – a gain of 50%. Over the same period of time, the standard unemployment rate rose 71%. But in months to come, this pattern will naturally be reversed. This will create a permanent unemployment gap – a nightmare scenario where the welfare rolls stay at elevated levels into perpetuity, keeping large numbers on the dole for many years to come.

Alarmingly, there is no sign that the reality of this rise in long-term unemployment has been factored into the budgetary projections for 2009-2013. But it is hardly trivial. It is estimated that each new person on unemployment benefits costs on average around €20,000 per annum to the state in lost Exchequer revenue and welfare payments. The loss to the society is at least double this amount due to lost economic output. Long-term unemployment is three times as costly as short-term unemployment because people don't save or invest. The damage to personal dignity, self-worth and social status is simply off the scale.

In purely economic terms, the current rate of increase in long-term unemployment and labour force withdrawals is costing Irish economy roughly €2.4bn per annum. And this cost is set to rise.

When Minister Lenihan chose to opt for a massive tax increases in his Supplementary Budget, he forced tens of thousands younger, less educated and lower skilled Irish workers into the long-term dependency on the State welfare.

The ESRI’s terrifying forecast this week pointed to an unemployment rate of 16.8% next year: implying that between 500,000 and 550,000 people will be on the Live Register.
My own forecasts, published a month ago, suggest that at least 120,000 people will become long-term unemployed. This doesn't even include another 50,000 new workforce dropouts. On this scenario, the total economic cost of the jobs destruction in this country would be a massive €27.4bn pa or over 16% of our expected 2009 GDP. Nearly half of this will be coming out of the Exchequer budget, costing the already financially stretched taxpayers an average of €8,500 per each working person annually.

Worse still, it is becoming ever harder to make as much by working as you would get on the dole, thanks to a combination of declining hourly wages, absence of new jobs creation and higher taxation. This week Garda Representative Association President Michael O’Boyce said that
“There are a number of young guards who have less [after tax] money to live on a weekly basis that those on unemployment benefit”.

By my recent estimate, in 2006 the average welfare recipient would have needed a per-tax wage of €37,000 to earn more than they would on the dole. Today this figure stands at over €41,000.

Think about it. As of last November, 21.5% of our 15-19 year-olds and 15% of our 20-24 year olds were unemployed. How many of them can count on earning E41,000 a year should they try to get off the welfare? The answer is none.

The current system of unemployment benefits and social welfare is trapping many thousands of able-bodied adults in a long-term dependency, costing the economy and the Exchequer billions, while producing no contribution to the society. But this need not be the case.

In the short run, we should engage the long-term unemployed in economically and socially gainful activity.

Unfortunately, the much-discussed and heavily subsidised training programmes, primarily run by FAS, are largely a waste of public resources when it comes to instilling the right skills and aptitude in those who have been out of work for more than a year. At the peak of Celtic Tiger jobs creation, in 2007, 30.3% of Irish unemployed people had been on the dole for over a year.

And, as international evidence strongly suggests, no state training agency in the world has managed to achieve a decent ‘back-to-work’ success record. The OECD countries which spent most on labour training saw below-average productivity growth between 1997 and 2007. In contrast, countries which had fixed-term unemployment and social welfare benefits and lower minimum wages outperformed the OECD average in labour productivity growth.

Thus, the only real solution to the problem of the long-term unemployment is to close our welfare trap. Traditionally, this means cutting the level of direct and indirect benefits to below the minimum wage earnings. This, however, is unimaginable at the time of a recession.

Instead, the government should consider converting current payments to the long-term unemployed able-bodied adults into a public works wage, payable in exchange for performing public services.

This yields two benefits. First, and foremost, it restores dignity to those who are long-term unemployed by making them once again active participants in the economy. Bringing home an earned wage is psychologically and socially superior to a state handout. Second, this will provide for at least some economic return in exchange for public funding. Cleaner streets and parks, improved road repairs and other public and social works (some of which can be in line with the participant's skills/training/past experience) will be a form of re-payment to the taxpayers. All at no added cost to the existent welfare rolls.

As the long-term unemployed acquire some on-the-job skills and tenure, their prospects for gaining proper employment will also improve. Economic recovery can start taking such workers off the state employment scheme, allowing to phase-out the expenditure. The compulsion to work for your public wage will also reduce the welfare trap by requiring at least some effort on behalf of the long-term unemployed in exchange for assistance.

In the long run, we will need to move to a capped system of benefits and allow for the significant deflation of benefits relative to the minimum wage. However, while the crisis persists, we should put the long-term unemployed back into the position of participating in this society. This, in itself, might prove to be more important to our future than all other state spending programmes taken together.