5/5/20: A V-Shaped Recovery? Ireland post-Covid

My article for The Currency on the post-Covid19 recovery and labour markets lessons from the pst recessions: https://www.thecurrency.news/articles/16215/the-fiction-of-a-v-shaped-recovery-hides-the-weaknesses-in-irelands-labour-market.

Key takeaways:
"Trends in employment recovery post-major recessions are worrying and point to long-term damage to the life-cycle income of those currently entering the workforce, those experiencing cyclical (as opposed to pandemic-related) unemployment risks, as well as those who are entering the peak of their earnings growth. This means a range of three generations of younger workers are being adversely and permanently impacted.

"All of the millennials, the older sub-cohorts of the GenZ, and the lower-to-middle classes of the GenX are all in trouble. Older millennials and the entire GenX are also likely to face permanently lower pensions savings, especially since both cohorts have now been hit with two systemic crises, the 2008-2014 Great Recession and the 2020 Covid-19 pandemic.

"These generations are the core of modern Ireland’s population pyramid, and their fates represent the likely direction of our society’s and economy’s evolution in decades to come."

7/6/2012: QNHS Q1 2012: Sectoral Decomposition

In the previous post I covered the top-of-the-line data on QNHS for Q1 2012. This time, lets take a look at some sub-trends by occupation and public v private sector numbers.

A handy summary table to outline changes by occupation:

Few surprises in the above table are:

• Twin (q/q and y/y) rises in Wholesale & Retail Trade category, 
• Y/y rise in Accommodation and food service activities with a level increase of 8,600. This appears to confirm the Government claims on the sectoral jobs creation on the foot of jobs stimulus. The problem with comparatives is that the y/y increase comes on foot of a sudden decline in employment in the sub-sector in Q1 2011 when it fell to surprisingly low, seasonally-unjustified level of 102,900. Sub-sector employment remains down on Q1 2010 when it stood at 123,700 or 12,100 ahead of Q1 2012, and it is down on Q4 2011 when it was at 113,400 against Q1 2012 at 111,600. The core factor in Q1 2012 differential on Q1 2011 might have been not so much jobs creation as the increased expense of jobs reductions under Budget 2012. This, however, is speculative argument at best. My suggestion would be to wait and see how the numbers employed in the sector pan out in Q2 2012.
• Another surprising thing is that in the category of skills closely aligned with Accommodation and food service activities there was a decrease, not an increase, y/y in terms of employment. Caring, leisure and other service category of workers saw employment drop from 142,300 in Q1 2011 to 141,500 in Q1 2012. Something is not adding up, unless the jobs created in the sub-sector were managerial and/or associate professional and technical.
• Not surprisingly, ICT sub-sector grew employment y/y with 6.81% increase on Q1 2011 - the only private sector sub-sector that posted an increase in jobs on 2007 levels (+5.31%), with only other two sectors adding jobs on 2007 levels being Education (+4.64%) and Human Health and Social Activities (+6.57%).
• For all the claims of MNCs employment gains, the core sub-sector of Professional, Scientific and Technical Activities has seen employment shrinking, not rising in Q1 2012 relative to Q4 2011 (-0.53%), to Q1 2011 (-7.56%) and on 2007 (-15.44%). Striking feature of these changes is that this sector was the hardest hit in Q1 2012 of all sub-sectors listed by CSO, amidst the robust IDA and Government claims that jobs creation in MNCs is ongoing and that R&D and innovation activities are booming.

In the core series for sub-sectors:

• There was a recorded rise in Education sub-sector. Employment in education stood at 144,200 in Q1 2012 - up 2.2% (or 3,100) on Q4 2011 and down 2.2% (-3,200) on Q1 2011. Since Q1 2007, employment in the sector grew by 4.64% or +6,400.
• Employment levels in Health and social work activities fell q/q by 1.96% (-2,000) but are up on Q1 2011 by 1.72% (+4,000). Compared to Q1 2007, Q1 2012 employment in the sector is up 6.57% (+14,600). 
• The two sectors above represent front-line services in their definition.  Between them, during the austerity period the two sub-sectors added 29,700 new jobs.

And lastly, two charts on dependencies ratios. Without any comment.

7/6/2012: QNHS Q1 2012: First results

The latest QNHS results for Q1 2012 are out. Headline readings from CSO release:

• There was an annual decrease in employment of 1.0% or 18,100 in the year to the first quarter of 2012, bringing total employment to 1,786,100. 
• This compares with an annual decrease in employment of 0.8% in the previous quarter and a decrease of 2.9% in the year to Q1 2011.
• On a seasonally adjusted basis, employment fell by 7,300 (-0.4%) in the quarter. This follows on from a seasonally adjusted increase in employment of 11,100 (+0.6%) in Q4 2011.
• Unemployment increased by 13,300 (+4.5%) in the year to Q1 2012. This brings the total number of persons unemployed to 309,000 with male unemployment increasing by 3,600 (+1.8%) to 205,400 and female unemployment increasing by 9,800 (+10.4%) to 103,600.
• The long-term unemployment rate increased from 7.8% to 8.9% over the year to Q1 2012. Long-term unemployment accounted for 60.6% of total unemployment in Q1 2012 compared with 55.1% a year earlier and 40.9% in the first quarter of 2010.
• The seasonally adjusted unemployment rate increased from 14.5% to 14.8% over the quarter.
• The total number of persons in the labour force in the first quarter of 2012 was 2,095,100, representing a decrease of 4,800 (-0.2%) over the year. This compares with an annual labour force decrease of 32,800 (-1.5%) in Q1 2011.

We have the above data to offset the incessant chatter from the Government about stabilizing unemployment and jobs creation. The success of the Irish State unemployment activation programmes and training schemes is clearly some time off, despite more than a year of current policies and the build-up of similar activation efforts under the previous Government.

Now to more detailed analysis. This post will focus on top-of-the-line numbers and subsequent posts will look at sectoral breakdown and other details.

Labor force participation has fallen to 2,107,800 in Q1 2012, down from 2,113,400 in Q4 2011 and down on the peak of 2,251,400 in Q1 2008. The annual rate of decline of 0.3% in Q1 2012 is shallower than Q1 2010-2011 rate of -1.6% and Q1 2009-2010 rate of -2.6%. Which is good news, kind of.

Numbers of those not in the labor force rose to 1,390,500 in Q1 2012 up from 1,389,600 in Q4 2011 - a shallow hike. Year on year, the rise was 0.2%, much more mild than 1.75% hike in Q1 2010-2011 and 2.94% rise in Q1 2009-2010. Again, sort of good news.

Numbers in employment fell to 1,800,300 in Q1 2012 from 1,807,600 in Q4 2011. (See breakdown of full v part time employment below). Again, the anual rate of change trend is toward shallower declines. In Q1 2011-2012 the rate of decline was 1.0%, against -2.85% in Q1 2010-2011 and -5.46% in Q1 2009-2010. At the peak, there were 2,140,600 in employment, now the number is down 340,300.

Overall number of unemployed rose from 307,300 in Q4 2011 to 312,800 in Q1 2012. At the lowest point in recent history we had 94,200 unemployed. Unemployed counts rose 4.6% y/y in Q1 2012, compared to growth of 8.13% in Q1 2011 and 24.54% in Q1 2010.

Both full-time and part-time unemployment levels shrunk in Q1 2012. Full-time employment is down to 1,383,500 in Q1 2012 from 1,385,000 in Q4 2011, while part-time employment is down to 417,900 in Q1 2012 from 422,300 in Q4 2011. Y/y full-time employment is down 0.6% compared to Q1 2011 y/y decline of 4.47% and Q1 2010 y/y drop of 7.25%. Part-time employment is down 2.1% in Q1 2012, against a rise of 3.24% in Q1 2011 and a rise of 1.847% in Q1 2010.

Unemployment rate has now reached its crisis-period peak of 14.8, more than erasing the slight moderation achieved in Q3 2011 to Q4 2011 (drop from 14.6% to 14.5%). A year ago, just as the new Government came to power, the unemployment rate stood at 14.1%. Of course, the previous Government has presided over much more dramatic rise in unemployment rates. In addition, economic conditions that the current Government has inherited clearly do not warrant much of optimism, especially in such sticky series as unemployment. Thus, the current numbers are not the matter for a blame game.

Participation rate has remained flat at 60.3% in Q1 2012, same as in Q4 2011, but is down from 60.4% in Q1 2011. At the peak we had participation rate of 64.1%.

The above has meant that our dependency ratios worsened in Q1 2012. Ratio of those employed to the rest of the working age population has fallen from 65.35% in Q4 2011 to 65.22% in Q1 2012. In Q1 2011 this ratio stood at 65.80% and in Q1 2010 it was 70.90%. At the beginning of the crisis the ratio was 98.80%. In other words, the proportion of those working in the economy is declining.

Summary of headline stats:

3/2/2012: Ireland's Jobs Creation & Destruction data

CSO recently published its analysis of the labour market looking into jobs creation and destruction in the economy - a new study, currently in the 'experimental' stage and a very welcome addition to CSO tools, in my view.

Here's the core data:

Per charts (source for the chart is CSO):

• Job creation has increased slightly from 9% in 2009 to 12% in 2010
• Job destruction has fallen significantly from 28% in 2009 to 18% in 2010 
• Net job creation (job creation less job destruction) remained negative at – 6% in 2010

Note to CSO - a table with data would be good - or at least labeling of values in the chart. And do please continue with this analysis.

Economics 20/11/10: Irish labour taxes are too restrictive

We often think of Ireland as low tax economy. We also think of ourselves as inhabiting flexible labour markets and enterprising world of work-hungry people.

Here is an interesting angle from which we can look at the labour markets. Suppose the cost of labour for an hour of work goes up 1% - due to an earnings increase or benefits rise. What does a worker get to keep out of this?

The higher the number is, the greater is the incentive to supply labour post wage/earnings or employer social security tax increases. The lower it is, the lesser are the incentives to work in the face of rising earnings or social security contributions.

Ex-ante, we would expect Ireland to see significantly higher returns to workers efforts from rising earnings and/or social security (PRSI) contributions by employers (reduced burden on employees and higher expected future benefits of PRSI funding). This, however, is not true.

Here are few charts from the latest OECD data set - for 2009, so not reflective of the Budget 2010 changes in taxes.

OECD defines the main parameter under consideration as: "Net income is calculated as gross earnings minus personal income tax and employees' social security contributions family benefits. The increase reported [in charts below] represents a form of elasticity. In a proportional tax system the plus elasticity would equal 1. The more progressive the system at these income levels, the lower is the elasticity."

Now, as you look at these charts, remember, the Irish Times crowd love droning on about the lack of 'progressive' tax system in Ireland.

First chart shows single person returns to 1% increase in labour costs with 3 sub-groups identified by their earnings:
AW refers to average wage.

Clearly, single people in Ireland have little incentives to supply more labour in response to an increase in their earnings. Alternatively, we do have a severely progressive system of taxation for labour when it comes to single individuals. Actually, for a single person earning 100% of average wage, Ireland is second to Hungary in the OECD in terms of progressivity of our labour income taxes. That's right - we have second lowest incentives to supply more labour (or in other words, we keep second lowest amount of added cost of labour in our pockets) in the entire OECD. For a higher earners (167% of AW) the picture is not much better - we are actually fourth from the bottom of the OECD league (or 4th highest degree of progressivity).

Now on to families with 2 kids:
Here, we have a slightly improved picture. For a family with 1 earner bringing in 100% of AW, we are ranked 16th in the OECD in terms of incentives to provide more work in return for increased earnings or contributions. For a family with one earner on 100% AW and another on 67% of AW, the same rank is 14th. Progressivity of our labour taxes in all 3 scenarios in the chart above is still above the average for the OECD.

Now on to comparing single person with no children and a family with 2 children:
Doesn't look like there's a great deal of premium to being married in Ireland, does it? Nope. If labour costs go up by 1 Euro, a single person on 167% of AW would keep 74 cents, a family with 2 kids with exactly same combined income will keep 80 cents. Both are worse off in Ireland than their counterparts in 27 countries (single person with no children) and 13 countries (married couple with two earners and 2 kids). Again, much of Irish Times-loved progressivity in either household income taxes.

What if we take lower earning individuals for the above comparison?
Here, the picture changes - average wage earners face much smaller progressivity of tax system than higher earners (notice, this is 'smaller progressivity', not 'smaller burden of tax').

But does having children actually help or penalises working households? Take a look below:
So working households with both parents working and 2 kids are allowed by our tax system to keep less of their higher income than their childless counterparts and single childless earners. That's really does begin to look like a perverse system of income tax 'justice'.

Let me summarise the data in a handy table:
By all metrics and for all categories, Ireland simply qualifies as a country where

• labour income taxation is significantly more progressive (in 7 out of 8 categories of earners it is more progressive than OECD average, 5 out of 8 than EU15 average and 5 out of 8 than advanced economies average)
• labour income taxation is significantly more restrictive of incentives to supply labour in response to higher earnings than the OECD or EU15 average

Not exactly a flexible market with great incentives to work, is it?

Economics 5/7/10: The toll of un- & under-employment

Two interesting charts on the ratios of full-time employed and live register signees to total working age population (note, this combines quarterly data from QNHS with monthly LR data, all expressed in quarterly terms):
I can't spot any turn around in either chart, yet both reflect the extent to which the burden of unemployment and under-employment is impacting this economy - on both sides of equation: for those who lost their work (the truly tragic outcome) and for those who have to cover the nation's bills while remaining in employment (also having tougher times).

Economics 02/06/2010: Regional variations in labour markets

While working on a project relating to economic policies in Ireland, I was compiling data on regional variations in various series. Here is a set of interesting graphs detailing the labour force differences across the main regions.

Each data set reflects the latest available QNHS data through Q3 2009 and each is presented in two charts - full history and a snapshot of the crisis dynamics since 2007.

First the unemployment rates
Notice that since time memorial Dublin runs at or below average in terms of unemployment rates. This pattern is no persistently broken, with Dublin unemployment performing remarkably better in this crisis. Also note that the top tier of unemployment black spots in the country also remains relatively resilient over time. This has to put to test any assertion that state policies to deal with longer term unemployment are working.

Take a look at a closer time frame, relating to the current crisis:
You hear a lot about the MNCs and exporting companies holding our line from a total collapse of economy. Well, say the same for Dublin, South-West and Mid-East. Of course, the latter is largely, hmmm, Greater Dublin, really.

The chart above also hints at something more disturbing here. Recall that early rounds of layoffs impacted predominantly construction sector and associated services. Well, look at Midlands and South-East. It does appear that the two regions were experiencing significantly faster rates of jobs losses in the early parts of the crisis than any other region.

One wonders what is the exact distribution of jobs in the country relative to places of residence. This, of course, is a long running question that CSO is refusing to ask on QNHS. What trouble can there be, folks, in asking a recipient to state where they physically work. It would tell us a lot about people's commuting patterns (helping to better plan transport systems) and about where people are actually employed (helping us to better plan associated business services provisions). But no - CSO staunchly refuses to ask. Why? Because the state is most likely unwilling to admit that the National Spatial Strategy and the IDA/EI mandates to produce jobs for regions is failing. Ireland has natural hubs of jobs and jobs creation potential - Greater Dublin area, Cork area, Galway-Limerick area. This is where jobs concentrate and where companies want to be. So how about a challenge to CSO - ask an important question, will you? Have some gumption...

Back to data: labour force participation rates next
What the charts above show is the precipitous decline in labour force participation rates since the peak of H2 2007. And these declines are worrisome, for we normally tend to ascribe the destructive effects of the economic crises to unemployment, forgetting about those who leave the work force altogether. Well - take a look at charts above.

Another disturbing realization on the foot of the above charts is that regions with lowest participation rates also tend to be regions with higher unemployment. This is important because it signals that even in a small country like Ireland, mobility between residential location and work location is still restricted (by distance, lack of proper roads, transport shortages etc). It also suggests that in the long run, areas with higher unemployment tend to become traps for non-participation in labour force. The vicious spiral of being jobless in an area with no jobs creation leads to becoming disillusioned and dropping out of the work force for good.

And this implies higher rates of overall dependency. Remember - these are numbers for able bodied adults. So if we take the rate of unemployed and add to it the rate of those who are not in the labour force, we get a proportion of population that needs someone else to work for them to sustain themselves. Now, a caveat here - of course some of those who are not in labour force are gainfully engaged in work at homes - non-market activities that are productive and include, among other very important ones, like carrying for the elderly or ill, raising children etc. These, however, are not the majority in these numbers. Nor are they likely to be distributed predominantly into higher dependency areas of the country. So conclusions presented below stand:
Predictably, the lowest dependency ratios are in high work regions: Mid-East and Dublin. And although these ratios rose in these two regions through the crisis, they are still well below the national average and leagues below the dependency ratios for the likes of Border and South-East regions. Here's a closer look:
Of course, what these trends mean is that throughout the entire series duration (from 1998) Dublin and Mid-East have acted as a subsidy generating regions for the rest of the country. Someone had to pay for the higher dependency rates in regions that are above country average (since the welfare rates are not varied geographically).

Economics 20/04/2010: Fas training for ex-Dell workers

Last week, media report (Silicon Republic, 16/04/10, 300 out of 1,900 former Dell workers received FAS training) provided some evidence that was supposed to show us just how effective Fas training systems can be.

"The Steering Committee responsible for advising on the implementation of the European Globalisation Adjustment Fund (EGF) for the 1,900 former Dell workers in Limerick has revealed that 300 have received FAS training so far... The committee ...is chaired by Oliver Egan, assistant director general in FAS. Another meeting is scheduled for towards the end of this month."

So hold on - so far, we know, there were meetings. And more meetings will happen.

"The Minister for Labour Affairs, Dara Calleary TD, commented: “There is a lot which has been done already and is being done with EGF support in the mid-west and which is perhaps only now starting to become visible”."

What is Minister on about here? (italics are mine): "In relation to concrete measures the Minister highlighted:

• The guidance service FAS provided to more than 1,900 former workers to date with some 300 persons receiving training in 2009 [note: this is a standard practice for large scale layoffs. How many of these 'graduates' actually found a job?]
• That in the first quarter of 2010, training and educational activity has increased with more than 200 EGF clients currently enrolled in evening classes, more than 250 EGF clients are registered with the Limerick City Adult Education Service [is that registration a pre-condition for some additional unemployment or other financial support?];
• That both Limerick Institute of Technology and University of Limerick have implemented a broad range of educational programmes for EGF clients [how many are enrolled? what types of programmes? what is the expected completion date?];
• That more than 150 clients having availed of EGF training support grant administered by FAS to date [so we have 1,900 workers laid off enrolled total, 300 completed Fas training, 150 are receiving a special subsidy, 100 more are 'registered'];
• That Fas runs a community-based initiative for more than 100 EGF clients [community-based initiatives rarely lead to gainful employment];
• That some 225 clients are registered with the City and County Enterprise Boards and are undertaking start-your-own-business programmes [Who administers these programmes? What are graduation rates and what are the success rates for new entrepreneurs?];
• The commencement of a dedicated EGF internship programme in partnership with the medical devices sector which will see more than 80 clients attending a series of workshops in April with successful candidates progressing into the full internship programme in June 2010 [This is perhaps the closest that Fas would ever come to giving these workers real hope of a gainful employment].

So, over 6 months after the layoffs, there are absolutely no hard numbers Minister Calleary can supply to show any success in progressing the former Dell workers into gainful employment. Surely, this is disturbing, given that Fas work does not come cheap and given that Minister has managed to set up a score of various schemes and taskforces - none of which are free to the taxpayers.

"I have committed to reviewing the overall programme in June to ensure that we are maximising the reach of the programme and to identify any additional or innovative measures that might be further considered,” Mr Calleary said. Really? So far, there are no indications that the review is going to be effective in assessing Fas' effectiveness in designing, administering and deploying these programmes.

Economcis 10/04/2010: Ireland's Competitiveness - not improving

Often overlooked today (in the usual media focus on credit flows), Ireland's Harmonized Competitiveness Indicators, published by the Central Bank are painting a really troubling picture.

The latest data, released this week in the CB's quarterly update shows that despite all the talk about wages, our competitiveness has not been improving at any significant rate during the current crisis.

Charts below illustrate:
First, the monthly figures above. It is clear that consumer price deflation acts as the only force that is inducing gains in competitiveness in Ireland. Even by this measure, improvements are not dramatic - over the course of the crisis so far, Ireland Inc has managed to improve its competitiveness only to the levels of August 2007! In other words - if 2007 was the year this economy was running on a toxic mixture of drugs and steroids, according to the CB figures, we are still reliant on the same toxic potion of uncompetitive prices and costs, except we are no longer capable of running at all.

Adjusted by unit labour costs, our competitiveness performance is even worse. We are, factoring out the seasonal effects, still in the economy geared to the boom.

The second chart shows quarterly changes:
This is really self-explanatory. Ireland Inc is absolutely out of touch, in economic terms, with its previous, competitive self. Having endured 4 years of unsustainable bubble (2004-2007), we are now lingering at close to the bottom of our historical competitiveness position.

Economics 6/04/2010: QNHS - the figures of despair

Time to take a closer look at the latest data from Quarterly National Household Survey - released a week ago. The focus below is on less recognized trends, so endure the charts...

Chart above shows the dramatic declines in our labour force and an even more dramatic decline of those in the labour force who are currently employed. In effect, unemployment has consumed two years worth of gains in jobs, plus another 3.5 years worth of increases in participation. Overall, we are now back in Q2 2004 when it comes to employment figures.

As a result, unemployment soared, but what we tend to forget in looking at the headline figure is that long term unemployment - lagging ordinary unemployment by some 12 months or more - is now precipitously rising...
Chart above shows that contrary to all the talk about 'bottoming out', the latest fall-off in unemployment recorded in Q4 2009 is seasonally consistent with normal patterns, implying that in all likelihood, unemployment figures will remain on the rise from Q1 2010 on.
Looking at employment changes broken down by occupation, it is clear that the crisis has seen most of jobs destruction focused at the bottom of earnings distribution - in areas that are less skills-intensive. There are, most likely, several reasons for this:

• Professional and Managerial grades are usually occupied by people with longer on-the-job tenure, making them more expensive to lay off, and more likely to be part owners of businesses and professional practices;
• Sales and Other are more flexible workforce components, linked closely to internal demand;
• One interesting change is amongst operative workers. This category includes some construction workers, but in general, it does appear to suggest that exporting sectors growth over 2008 was more likely underpinned by transfer pricing by multinational rather than by real expansion of physical production.

Overall, however, it is worth noting that occupations with greater human capital intensity of production are holding up much much better than those where people are closer substitutes for technology and machinery.

Change in working hours also reveals some interesting features of the changing labour force:
We clearly are having a secondary crisis in terms of under-employment, whereby workers might be retaining jobs, but their hours worked are being cut back dramatically. Percentage of full time jobs has clearly declined, while part-time jobs are on the rise.

And unemployment is becoming a long-term condition for an increasing number of workers:
The numbers are pretty self-explanatory, except that one must add to these figures an observation - long-term unemployed are much harder to shift off the welfare than those in shorter term unemployment. Note that 29,400 long-term unemployed back in 2007 were pretty much unchanged since the beginning of the century. Since then, however, we just added 59,700 more of those who are risking to becoming permanently unemployed into the future.
While unemployment increases (chart above) were the feature of 2008 labour market collapse, job seekers (both in education and outside), underemployment rises and full-time employment fall-off were the main features of of 2009. These are likely to remain dominant in 2010 as well as unemployment reaches deeper into skills distribution over time.

This is confirmed in the following chart:
Notice that S3 and S2 (broader) categories of stressed workers are rising faster through out 2009 than the more narrow unemployed category. Should the positive move in Q4 figures be reversed (see above discussion), there is significant likelihood that these broader categories will continue to increase at a faster pace than simple unemployment measure, further increasing surplus capacity in the economy and putting more income uncertainty onto the shoulders of those still in full-time work.

Returning back to the issue of skills: chart above shows that both in 2008 and 2009 workers with greater human capital attainment were in lower risk of unemployment than those with lower educational attainment. Of course, this is a result of several forces:

1. Workers with higher educational attainment tend to be more productive in same occupations;
2. Workers with higher educational attainment tend to have better aptitude;
3. Workers with higher educational attainment are also more likely to engage in continued up-skilling and on-the-job training;
4. Workers with higher educational attainment tend to possess more flexible sets of skills;
5. Workers with higher educational attainment tend to be employed in more competitive and exports-oriented sectors and companies, etc.
   

All of this, however, suggests that human capital matters even in amidst a wholesale collapse of the labour market experienced in Ireland.
And, as chart above shows, workers with higher human capital attainment are also more likely to be fully engaged in the labour force. Which means two things:

1. Human capital is an important differentiator in a recession; and
2. Those currently fuelling longer-term unemployment are more likely to be with lower skills, and thus are more likely to exit labour force and remain outside the labour force for a much longer period of time.

In short, we are now at risk of creating a permanent underclass of under-skilled and under-employed.

And to conclude - two charts on comparisons between Ireland and the rest of EU27:
Participation figures above clearly show that our labour force has experienced a much more dramatic collapse than in any other country in the European Union. At the same time, our unemployment has risen less drmatically:
Which suggests that the gap between us and the worst performing European countries (Spain and the Baltics) masks a much more troubling reality: Irish unemployed are much more likely to drop out of the labour force (and thus out of unemployment counts) than those in other European countries.

This, of course, is a sign of much deeper despair.

Economics 10/02/2010: Can Labour Party lead?

Does a coalition involving any party in partnership with Labour makes sense?

Unfortunately, despite Labour Party having in its ranks some very talented and economically literate senior politicians (Joan Burton and Ruairi Quinn come to mind), there is a legacy of the LP being largely captured by the Trade Unionist movement. In times of economic expansion, this risks the party pre-committing itself to the policy platforms that:

• expand public sector beyond economically efficient levels;
• make the above expansions permanent in nature (i.e. irreversible); and
• commit the state to correcting any potential funding shortfalls out of tax revenue increases.

In this context, it is irrelevant whether or not the Labour Party can or cannot commit to a credible path of public sector productivity reforms. It is simply a party that will find it impossible to impose fiscal discipline on its own constituency.

For example, consider the current situation with public sector wages and non-wage earnings clearly being out of line with private sector and with the reality of economic crisis on the ground. Two past policy dimensions, each one sufficient enough to rule out Labour's ability to impose fiscal discipline on the state, that come to mind:

1. Labour consistently supported increases in the lower tier wages, thus advocating a compression of wage distribution from the left tail. In current environment, Labour could cut upper tier public sector wages, further compressing the distribution, this time from the right tail. But it cannot commit to shifting the entire distribution left. And this means that any savings achieved will be poultry and will not go far enough to address the existent wages gap between public and private workers to the left of the median wage.
2. Labour also persistently advocated minimum wage increases. A cut in a minimum wage, therefore, is not an option for Labour. But absent cuts in minimum wages, what policy can promote jobs creation at the bottom of the skills distribution? A cut in the cost of employing workers - aka a cut in employer PRSI - is also out of question for Labour. Training and state subsidised employment simply cannot deliver sustained jobs for this category of unemployed.

The legacy of traditionalist approach to class politics is tainting Labour party platforms today. Their current proposals for dealing with unemployment virtually invariably require the State to find new funding to expand existent programmes, such as investment in education and training, a jobs fund in the Budget and a new National Development Plan. Funny thing is, Labour party seems that propping up the same programmes that failed to deliver jobs in the times of the boom (aka all mentioned above) will somehow, once expanded, deliver jobs in a recession.

There is also a strange belief, on behalf of Labour party that extending a place in a university to everyone who applies (see here), regardless of their merit or ability, is a jobs-supporting policy as well. In following this, Labour commits two cardinal errors:

• It implicitly beliefs that getting a college degree improves ones ability to gain employment; and
• It explicitly assumes that providing tertiary education for all is necessarily net-additive economic and social activity.

In other words, Labour party fails to recognise that education can yield diminishing social and economic returns and it fails to recognise that the rate at which social and economic returns diminish is unrelated to the quality of graduates.

So there you have it - despite having some very good people in its ranks, Labour party is simply not a credible contender for economic crisis management.

Economics 02/02/2010: Minimum Wage Blues

For those of you who missed my last Sunday Times article, here is an unedited version.

Last week, this newspaper reported about the successful Competition Authority probe into a price fixing cartel involving a number of car dealers. Of course, price fixing is illegal in Ireland. Illegal, that is, unless the perpetrator of it is the State. For proof, look no further than the price of unskilled labour – the minimum wage rate.

The end result of this law – a product of collusion between the Government and the Unions – is two-fold.

First, like any other collusive arrangement, the minimum wage leads to a long-term deterioration in the employment creation in the economy. Economists commonly link this to the deterioration in our overall competitiveness.

Second, minimum wage distorts incentives and choices of employers and employees. Over time, investment in skills, knowledge and aptitude fall for minimum wage recipients and lower-skilled, marginally more expensive employees, while businesses are incentivized to substitute their hours of work with physical capital. The age-old fear of machines displacing people is, thus, a logical denouement of the minimum wage.


The fact that the minimum wage laws reduce overall country competitiveness in the sectors heavily reliant on unskilled and low-skilled labour is undeniable. Ireland no longer registers meaningful contributions to its economy from mobile low-wage sectors. Only those lower skills activities that are captive by their nature – such as local protection services – remain here. However, the effects of the minimum wage on workers themselves are far less understood.

There is plenty of evidence that minimum wages lead to reduced employment of the lower-skilled and younger workers. Less known is the fact that minimum wage distorts education decisions of the young. Recent research from the Michigan State University shows that states that raised their minimum wage experienced increased unemployment amongst the low-skill teenagers who had previously dropped out of school. Higher-skill teenagers were more likely to get jobs, increasing their early exits from education. In other words, those who were best suited for early employment could not get a job, while those who were best suited for continued education were incentivised to drop out.

In the long run, minimum wage also shifts resources within various sectors of economic activity. Data for Ireland clearly shows that since introduction of the minimum wage here, traditionally labour-intensive sectors have seen their labour share of productivity decline, while capital share of value added has expanded. In some, labour productivity actually fell in absolute terms. These are the sectors, including hotel and restaurant services, construction, traditional manufacturing sectors, retail services and real estate activities and other, where minimum wage covers a larger overall proportion of the workforce. In contrast, other labour-intensive sectors, where wage structure was not dependent on minimum wage constraints, such as modern manufacturing, financial and professional services and wholesale and logistics services, have registered an above-average increase in overall share of value added attributable to skills and labour inputs. This trend, present in the data since introduction of the minimum wage, was not there prior to 2000.

And Ireland is hardly unique here. A study from the University of California recently showed that employers have reduced employment of the less skilled and increased employment of higher skilled workers with an emphasis on formal job training credentials in the wake of increases in minimum wage rates. For anyone concerned with the plight of the disadvantaged youths, these findings should ring the alarm bells.

Often, proponents of minimum wage laws argue that some studies have found little effect of the minimum wages on aggregate level unemployment. The problem, of course, is that such arguments neglect the issue of movement of people in and out of the labour force. While minimum wage hikes lead to higher average wages paid to those in employment, workers who lose their jobs often drop out of the labour force. As such, their numbers simply disappear off the unemployment count.

Hardly a right-wing liberal, Paul Samuelson, winner of the 1970 Nobel prize in economics had the following to say about the proposals to raise minimum wage: "What good does it do a …youth to know that an employer must pay him $2 an hour if the fact that he must be paid that amount is what keeps him from getting a job?"

This is a non-trivial observation, because it reveals one of the most damaging effects of the minimum wage laws in the modern economy. Nobel Prize winner Professor Gary S. Becker, suggested back in the 1970s that minimum wage acts as a dis-incentive for firms to invest in training of its lower-skilled employees. A recent pan-European study confirmed this to be the case across the EU, including Ireland.

The result of this is the creation of a two-tier economy, whereby those with no general and firm-specific skills remain at the very bottom of the economic hierarchy, while those with above-average skills are moving further and further up the skills chain. The companies, over time, respond to this separation by either choosing to invest more into machinery and technologies that can displace lower-skilled workers or by focusing their production processes on accumulating high quality staff.

This process drives the polarization of the overall Irish economy into what is known as ‘Modern’ and ‘Traditional’ sectors. It also drives deeper divisions amongst the lower-skilled and poorer workers by redistributing income within the lower earning segments of population. Some lower skilled get higher wages, others get permanent unemployment. In the US, a study by the National Bureau of Economic Research has shown that the 1997 hike in the federally mandated minimum wage has resulted in a 4.5 percent increase in the number of poor families.

But minimum wages do more damages than that. Generationally, it is the younger workers who tend to possess lower skills and have trouble signaling to the potential employers their latent abilities and aptitude. They also face higher unemployment rates, both at the times of growth and recession. For them, minimum wage laws create insurmountable barriers to escaping the twin trap of unskilled unemployment.

On the one hand, high minimum wage will increase the risk to the employer from hiring a wrong person, thus reducing the incentives to take on younger workers with unproven skills or performance records. On the other hand, the same workers need to gain access to positions which provide extensive on-the-job training in order to progress within the company. Even more importantly for the lower-skilled workers’ future, they need job environment that supports acquisition of generic skills and aptitude that can be transferred to other employers. Both of these investments are severely constrained by the presence of the minimum wage laws. The severity of this constraint is proportional to the gap between the minimum wage level and the average productivity of the workers seeking entry-level employment.

In other words, given the choice between hiring a young unskilled person for €8.65 per hour and a worker with more experience for the same rate, employers will always choose the latter. In times of robust growth, this might matter little, as other employment opportunities are abundant. Today, the picture is different.

Based on a comprehensive survey of minimum wage studies in the US, a 10 percent increase in the minimum wage tends to reduce employment of young workers by 1-2 percent during the times of abundant jobs creation. It is safe to assume that the rate is double in the times of tight labour markets.

Between 2006 and mid 2007, Irish minimum wage rose from €7.65 to €8.65 per hour, implying an associated decrease in employment of the younger workers of 1.3-2.6%, or up to 4,800 individuals amongst those under 25 years of age. Translated into the period of rising unemployment, the elevated rates of minimum wages in Ireland today are likely to be responsible for keeping up to 10,000 younger workers outside gainful employment.


In the end the problem with the minimum wage laws is that they always attempt to influence the supply and demand, just as any price fixing cartel would intend to do. The truth is, in such cases, invariably, the laws of supply and demand win – to the detriment of the most vulnerable and the youngest in our society. For their sake, it is time to rethink our minimum wage laws, before a new permanent class of young, unemployed and unemployable becomes a reality of Ireland’s post-crisis economy.


Box-out:

This week, Standard & Poor's has finally thrown in the towel and cut the ratings of the Irish banks’ bonds. While the news that our banking system stability overall is ranked alongside that of Slovakia and Korea galvanized business news desks attention, two interesting parts of the S&P analysis largely escaped the media. S&P explicitly provides the proof that the Banks Guarantee and Nama jointly underwrite a bailout of the Irish banks’ bondholders. Absent the two measures, AIB bonds would be rated BB/Negative/C+, while Bank of Ireland bonds would be at BB+/Negative/BB-. If not for taxpayers’ cash, bonds of our three largest banks sold to the public would require a health warning, stronger than the one posted on a packet of cigarettes. Only IL&P would stay above the waterline with BBB-/Negative/B absent state intervention. This, of course, would only be achievable assuming that the company’s life insurance business will continue to underwrite its banking branch – an idea that should be alien to anyone with an ounce of sense. In a separate comment, S&P also directly linked the poor prognosis for Irish banking sector to our sick economy. Of course this contrasts Government optimism around Nama. Remember – Nama promises to restore credit flows via ‘repairing’ banks balance sheets. S&P says that the balance sheets will remain sick after Nama as there is no real support for credit quality improvements coming from our weak economy. You decide whom you believe – Government’s contrived ‘supply will restore demand’ argument or S&P’s view that ‘weak demand will drag down supply’.

economics 16/12/2009: Unemployment and Jobs Destruction in Ireland

QNHS data is out for Q3 2009 and guess what... well, nothing new, really. Official unemployment rate is now 12.4% - just 10bps away from the Live Register-based Q3 average estimate of 12.5%. The cheerleaders are shouting 'A slowdown in the rate of growth in unemployment! Happy times ahead!'

But the real world data shows much darker picture. The biggest problem with unemployment is how you define it. If a person would like to have a job but is so discouraged by the labor market that he or she decide to stop looking for one, then they are not in the labor force and thus are not unemployed. Similarly, if a person had a job and upon losing it moves out of the country is search of better prospects elsewhere, then they are no longer unemployed. And if a person, disheartened by the prospect of long-term unemployment simply stops answering CSO phone calls, then she is also not unemployed.

But in the real world, all of these people are unemployed. All of these people's lives are lost in the economy even if they are not measured by the CSO.

This is not to criticise the ways in which CSO collects data. That is not the point. The point is that we need to understand just how many jobs were lost and not regained during the current crisis. And this we can glimpse from the QNHS data.

In Q3 2009 total employment fell 40,200 on Q2 2009. In 12 months to the end of Q3 2009, Irish economy shed net of 183,400 jobs - the rate of loss of 8.8% or the highest rate of jobs destruction on the record. In the course of this recession, we have now lost some 236,300 jobs.

Let's do the maths. The above losses imply:

• €13, 450 million in lost economic activity in Ireland
• €1,500 million in lost income tax to the Exchequer (using lower rate and no income levies)
• €3,750 million in lost consumption
• €675 million in lost VAT receipts, and so on

Notice that all of these jobs came out of the private sector and a number of contractors to the public sector and thus these losses cannot be offset even partially through reduced Exchequer wage bills.

And the problem of falling labor force is a sticky one. The overall participation rate has contracted from 64.2% in Q3 2008 to 62.5% in Q3 2009.

Much of the fall in the labor force is being driven by:

• long term unemployment pushing people into permanent welfare traps;
• exits from the workforce by students who are at a risk of completing new education and not finding new jobs afterward (for 15-19 yo participation rate has fallen to 22.7% from 30.8% a year ago, while for 20-24 yo group it stands at 72.9% as opposed to 77.4% a year ago), and
• emigration.
  

Last year, some 45,000 non-Irish nationals left the country, as in left their gainful productive employment in this state and moved on to be productive elsewhere. That's not so good for our economy. Many worked in the construction and domestic services sector and had skills beyond their jobs. Ireland is losing on their productive potential. But many worked in traded services and here the losses are even greater. The future of Irish economy is in traded services first and foremost - that is the elusive 'knowledge' economy we've been pursuing (even though our policymakers have no idea that this what it is). This economy requires more people with cultural, linguistic and skills sets that are distinct from our average 'national' skill-set. Ireland is losing now on our future productive capacity as well as on the immediate one.

And so on the net, CSO data shows that while unemployment climbed by roughly 120,000 over the last 12 months, the actual fall in employment was 185,000 or 65,000 greater. It is the net loss of jobs figure that is more telling of the realities of Irish unemployment than the headline unemployment rate.

Finally, courtesy of Ulster Bank - a table showing that unlike in earlier QNHS releases, Q3 saw industry displacing construction sector as the main source of jobs destruction:
This is another batch of bad news for anyone who, like our Minister for Finance, believes that things are past their worst. In addition, notice that wholesale & retail trade is about to take over construction as the second greatest contributor to unemployment. Wait until Christmas sales are over for that...

Economics 28/11/2009: Irish labour market snapshot

An interesting paper on labour market published last week provides a good insight into pre-crisis comparatives for Ireland vis-à-vis other Euro area states, the UK and the US. In general, in labour markets, there are processes of job creation and destruction, which are related (but not necessarily perfectly) to workers’ hirings and separations.

Literature on these suggests that “idiosyncratic firm-level characteristics shape both job and worker flows in a similar way in all countries”. But is it so? Do national characteristics matter?

Andrea Bassanini and Pascal Marianna of OECD (IZA Discussion Paper 4452) used cross-country data based on comparable methodologies “to examine key determinants of these flows and of their cross-country differences”. In general, the authors found “that idiosyncratic firm (industry, firm age and size) and worker (age, gender, education) characteristics play an important role for both gross job and worker flows in all countries. Nevertheless, …even controlling for these factors, cross-country differences concerning both gross job and worker flows appear large and of a similar magnitude.”

In summary, “both job and worker flows in countries such as the US and the UK exceed those in certain continental European countries by a factor of two [suggesting much more enhanced worker mobility and jobs creation and destruction in the UK and US]. Moreover, the variation of worker flows …is well explained by the variation of job flows, suggesting that, to a certain extent, the two flows can be used as substitutes in cross-country analysis [in other words – the structures underlying jobs creation and jobs destruction are largely country-specific]. Consistently, churning flows, that is flows originating by firms churning workers and employees quitting and being replaced, display much less cross-country variation.”

You can read the whole paper here, but I will focus on summarizing its findings regarding Ireland. Authors used a limited sample for Ireland (2000-2003), but it was the sample that covered years before the property bubble. In other words, it was a sample closer to the real Irish economy in action, only less pumped up by the steroids of overspending and crazed investment boom.

Table below based on the paper findings, but recompiled by me to illustrate Irish comparatives, shows Ireland as a country with labor markets that are average in their behavior when compared to other developed economies. Contrary to the claims of our political leaders (who painted Irish labour markets as being ‘socially’ focused) and their opposition (who painted Irish labour markets in the hues of cut-throat capitalist competition), we are what we really are – average.

Note: Excess job reallocation is a measure of simultaneous and off-setting job creation and job destruction by different firms belonging to the same group. In other words, excess job reallocation represents the reallocation of labour resources between firms within the same group whereas the group’s absolute net employment change provides a measure of reallocation across different groups of firms (e.g. different industries).
Table above shows probability of worker reallocations (changes in employment status or employer) per annum, probability of reallocation due to excess – excess in jobs turnover over the absolute change in net total employment, probability of new hiring in a year and probability of a layoff or firing (separation). Miracle is – we are very close to an average, even though Ireland was experiencing stronger growth in 2000-2003 than majority of the countries listed in the table.

Another table above shows that in terms of differences between reallocations and excess layoffs, hirings and separations, Ireland is sports a difference from the average only in terms of reallocations net of excess, or that component of the probability of changing work status or employer that is not accounted by movements of jobs within the same sector. In this area we have a higher rate than average, most likely reflective of former ICT sector workers being shifted to new sectors in the wake of the Tech Bubble collapse. Another area of difference relates to hirings in excess of separations, which implies that Irish economy was net additive of new jobs at the time at a strong rate. All other parameter readings are average.

So for a pictorial representation next. Higher worker reallocation rates – similar to other growth economies of Denmark, Finland, Spain, UK and US. Similarly higher excess worker reallocation. Slightly above average hirings rates and average separations.
And as far as differentials go:
Below average excess less hiring reasons for reallocations, slightly above average excess less separations (jobs destruction was rather weaker in Ireland in this period than in the average economy in the sample) and above average hirings less separations – again for the same reason of rising jobs creation.

So what about ‘gender issues’ in the workforce? Surely here we have lots of ground to gain as our Irish Times pundits on economy have been busy shouting about various gender gaps and glass ceilings?
Well, as far as hiring rates by gender go, we are below average for both men and women, and remarkably, there is no difference evident by gender whatsoever. The only other country with such levels of hiring ‘glass ceilings’ is… Sweden. That said, our overall mobility due to hiring was a bit weaker than the average. But not by much.

Separations by gender? Do evil capitalists fire women more frequently than men in Ireland?
Yes, rates of separation from employer for women were in excess of those for men in Ireland, but both rates were below the group average and the differences across gender lines were less pronounced in Ireland than in… Sweden, Norway, Finland, Denmark, and Switzerland. Either these countries are even more sharkish capitalist economies or there is no evidence of Ireland’s labour markets being much tougher for women then for men.
Chart above shows that in terms of gender imbalances in reallocation rates by gender, Ireland was in the below-average tier of the sample countries. And that mobility gap between men and women was smaller than the one found in many other social(ist) democracies of our Europa Land. Average we were in this category as well.

If there was no real need for a radical Government intervention to protect Irish women from sharp labour market practices of employers, what about the famous age gap? May be here there we find a smoking gun?
Not really. All age groups in Ireland saw similarly below average rates of mobility due to hirings. And overall age gap was similar as that of the average economy. Nothing dramatic happened here, folks.
Nor were our separation rates by age category drama-filled either. Below average – reflective of tighter labour markets in general and employers’ desire to hold on to workers in the age of rising wage inflation. Only the older cohort of workers experienced more jobs turnovers than average, and then not by much. For a much younger society than our peers this suggests that there was hardly a difference by age in separations after all.
Worker reallocation rates by age – same story.

Now, we’ve all heard about our marvelously educated labour force. With so much education, would Irish economy treat various education cohorts differently in the labour market? Afterall, a handful of less educated workers would really stand out in the sea of excellence that is Ireland Inc’s workforce.
Alas, the rates of hirings were below average in Ireland for all education groups, ecept highly educated. Now, here is a strange thing – if we had a highly educated labour force then, this would imply diminishing demand for such oversupplied ‘commodity’. In turn, demand rocketed. Either we all were working for high-education-intensive companies (MIT Media Labs?) or our ‘high’ levels of education were just average in quality/quantity…
Separations tell the same story – these are movements of workers out of jobs and they are… below average for highly educated and average for medium educated and low for low educated. People seemed to have been relatively happy to hold their jobs.

And so on to reallocations rates:
Below average for all…

And so, positing a question: in 2000-2003, were Irish labour markets closer to Boston or to Berlin? The answer, alas would be a disappointing neither. We were, in fact, closer to that inextant Kingdom of Average. Time to stop class warfare?