Tuesday, May 25, 2010

Economics 25/05/2010: Here's one for the Budget 2011

Just a chart - from IMF Fiscal Stability report:
Now, as noted - this excludes housing, medical cards, child supports etc. Given that in Austria, Belgium and Denmark rental values are lower, while healthcare is universal for all, where does it put the combined value of long term unemployment benefits in Ireland compared to these two countries? And given our wage deflation since 2008, relative to Austria, Belgium and Denmark?..

Of course, we simply have to omit the petro-dollars fueled economy like Norway from consideration. Notice - this chart reflects comparatives for 2008 data for long term unemployed. Cutting unemployment benefits is a hard target. We will have to face that choice, however. Given this, my view would be to impose more significant cuts on longer term recipients, and lower cuts on short term recipients. This should create stronger incentives to seek employment and skills for those who have the lowest propensity to do so - the long-term unemployed.


Unknown said...

7 years benefits is all any unemployed person should get. A person on 196 Euro is better off than a person on the so called minimum wage because there is no pressure,travel costs, food, drink and NO time off to make money by yourself

Anonymous said...

Hi Constantin, this is interesting.

However, I wonder if there are two sides to this coin. Cutting social welfare and improving incentives to upskill and find work will surely be necessary, but will this work on its own, without some meaningful strategy to create jobs?

I was reading recently about Keynesian economics and FDR's New Deal in the aftermath of the Great Recession. The theory was that excessive competition lowered wages and prices, which in turn lowered demand and employment. Dean Baker of the Gaurdian wrote in favour of a Keynesian approach here: http://www.guardian.co.uk/commentisfree/2010/may/17/keynes-danger-deficit-reduction

Would you be in favour of such an approach?



Mack said...

Cian - presumably you could offer incentives to the long term unemployed that could enable them to keep their current benefits as long as they were endevaouring to progress - e.g. taking a course, working as a volunteer with a non-profit / charity, applying for jobs - attending interviews & not turning down any jobs offered (esp. on the basis that after 5 years you need work experience).

laughingbear said...


happy to somewhat disagree here with you. To cut these benefits is not creating incentives to seek employment where there is none.

See, in germany they tried this with Hartz 4, and it is nothing short but disastrous, in fact it created as slave labour market, where academics out of jobs are forced to work in 1 Euro Jobs.

Another fact is, that most of the people on these 1 Euro jobs never will reach the first labour market again, they are doomed to stay in this second level, slave labour market instead.

Apart from that, it created another social divide which I can only warn to establish. Where they seriously could start cutting back are the phletora of benefit fraudsters that sign in multiple times in different locations etc. This has never been really tackled to a degree worth mentioning.

TrueEconomics said...

I've been slow to reply not out of the lack of interest - just usual time constraints. It's good to have a lively debate here.

Patrick, yes - 7 years is about right, but we can hike it to 9 years, life time cap. After that - your benefits fall to 1/2 of the going rate. This, of course, applies only to able bodied adults who do not engage in productive activity, such as caring for the elderly or disabled person etc.

I do not treat this as a major generator of savings for the Exchequer. It is just a long term reform of the system.

We have Financial Regulator talking today about being careful not to generate significant moral hazard in helping those who are defaulting on mortgages. No one is talking about the moral hazard of perpetual life-long welfare dependency.

Anonymous - absolutely agree - we need much more than just welfare reforms and up-skilling. We need jobs creation as well. Here my other suggestions would be to introduce a range of tax incentives to create new jobs and a range of measures aimed at boosting indigenous and imported investment and entrepreneurship. Reforming bankruptcy laws will also fit nicely in the agenda of growing entrepreneurship.

Keynesian approach does not work - I wrote about the fallacy of 'spend to get jobs' ideology on many occasions. There is no evidence that it generates sustainable growth in large economies and there is evidence showing that it actually leads to immediate contraction in economic growth in small open economies.

If Keynesian policy was net additive of jobs and value added in the economy during a recession, why not keep on running the scheme in the periods of growth?

Cian, I would introduce modest cuts - 10% max for short-term recipients, depending on their characteristics. Again, we are dealing only with healthy, able bodied adults. Single mothers or single parents in general - I would actually cut around 5%, but will tie in at least 10% of the remaining amount to their kids performance in schools and consumption of children educational and nutritional products. Ordinary short-term unemployment benefits (<12 months) I would cut 5-10%. No cuts for those caring for the elderly or the disabled. I would reduce unemployment benefits by 5% in year 2, and then 10% for every subsequent year drawn until the benefits fall to 50%.

Long term means-tested welfare will have to be set at that level. A person will be allowed to take part time work - as long as it is bringing in no more than 60% of the unemployment benefits maximum without incurring any penalty on their social welfare. And as long as it is legal and taxable.

I would police cheats. You have a new car in the parking garage and you are on welfare - explain sources of income... and so forth.

Yes, Cian, there is a stigma around long term unemployed. And no, I do not think they all are lazy. Many are disillusioned. Some gave up and are dependent on escapist addictions etc. There are many more complex reasons for people to be stuck in welfare trap. And yes, you are right, just reforming welfare will not supply jobs for all. It will induce some to move into workforce. It will induce few (but precious few, I must add) to get new skills. But we do need also jobs creation and growth in the economy.

One of the reasons why long term are stigmatized is because our welfare system allows us, middle classes and excuse to ignore the long term unemployed. We pay taxes and buy an indulgence not to care. If we reform the system and make it clear, transparent and also with strong means for getting our unemployed - long-term unemployed - onto career ladder, we will change our own attitudes to them. And that would be a massive, in my view, dividend to our society.

TrueEconomics said...

Cian, yes, other things should be considered in tandem.
1) Leaner Gov, Civil Service & Healthcare
2) Reduce costs for running businesses.
3) Reduce cost of failure for entrepreneurs and people willing to take creative risks, including those at work. Take Google model - you allow innovation and creativity, while controlling the cost of failure. Can't we do the same with our business regulations and laws?
4) Encourage real investment - not Section 23 or whatever dumping of cash into bungalows, or so-called 'public investment' in white elephants. Real investment. You do not do this by targeted tax break, but by lowering tax on capital gains and savings.
5) Reform pensions - public and private.
6) Reform immigration laws - to give meaning to the 'green card' scheme and to encourage people coming to Ireland to launch new jobs and invest here.
7) Reform our overseas aid - we are currently sending millions to countries that jail people because they are gay, or because they insist on their other basic human rights. Let's stop this nonsense. Lets set a standard - we will not aid. We will invest in the developing countries, for a reasonable rate of return - say the yield on our bonds, with any surplus over that rate accruing to the destination of investment. And we will transparently, up front tie this arrangement to the country of investment adhering to the principles of upholding universal human rights for its citizens. Thus, we can do good across the board, while simultaneously not taxing our own citizens.

Mack, yes, we can offer some incentives. Positive - in terms of providing them with subsidised training and education and even creating bursary for performance-based scholarships (an award system for those who excel on top of free education and free training). But we will also supply incentives based on their desire to avoid significant declines in their standards of living down the road.

Lauhingbear - let's try and learn from German experience and others. We are a small country and we can distinguish where a PhD is being used a slave laborer (actually - we can't, look at some of our junior faculty earning multiples less, while working in multiples more productively than some of our senior faculty - something that doesn't happen all too often in the US, for example) and when a person who would otherwise spend their entire life adding no value to the society works for low wages. There are differences. And we have to be careful.

Simply cutting benefits, as I have suggested won't deliver a functional reform of the whole welfare system. Or for that matter the entire social arrangement between those who work, those who do not want to work and those who make their living out of ensuring a transfer of payments from the former to the latter. But it is a step in the right direction...

Keep on commenting!


Unknown said...

What about the quagos. We have up to 1000 of them now and they are costing us around €13 Billion a year. We also have multiple quangos doing the same job.

Here's an article in The Times:

Here's a document produced by Fine Gael.

Anonymous said...

hi, Constantin,
I have just come across your comments
on unemployment benefit and cuts
and wonder what you would make of my experience;
I receive jobseekers allowance and am registered as casually unemployed(I am signed to an employment agency and
get work on an ad hoc basis.
I recently worked thurs+fri in one week and then mon+tues in the next.
I am paid for work done in the week following that in which I've worked.
However, I am disallowed benefit payment for any day worked. SO FAR SO GOOD.. But the welfare week runs from tues to tues! So I was disallowed ANY payment for 1 week.
Payment for work done was split over 2 weeks and because I was only required for 6 hours each day I ended up working the four days for a nett loss of 80 euro. This loss meant that I had no money for 5 days and had to abandon a payment to my credit union for a loan taken in better times. My wife(a home help) works 5 hours a week and between us we manage to pay utilities, tax, refuse charges etc. and have managed to do so for 2 years. I feel that I and many others like me have "answered a call to patriotism" and do so on an everyday basis. I also feel that I have kept my part of the bargain in paying my tax+Prsi while working.
I accept that those now in work may feel they are being "hard done by" but when I work to contribute I am ill served by feeling cheated. I have sought employment for 2 years
am not "trapped" in a welfare dependency. I am,however, despairing when I see funds being routed arrogantly in my name to corporate, banking, academic,and governmental cheats and thieves. We are all in this together but some of us more so.

TrueEconomics said...

P, I think you've been caught in a Kafkaesque bureaucratic idiocy of our system. Not a single reasonable human being would say you should be put into a situation like this!

I agree with you that people who paid PRSI & taxes in this country have earned help and I would not for a nanosecond suggest that people should not have access to a decent safety net.

By the way, this is also why I distinguish unemployment benefits (earned and set at the levels that afford decent standard of living for people who through unfortunate circumstances need to use this insurance service) from welfare benefits (in my view - welfare, ex unemployment or disability, is wholly unearned and should not be extended at the same levels/rates as unemployment).

I'd say the state owes you the money back with interest!

I certainly wish you all the luck needed to find a good, suitable, satisfying work!