This is an unedited version of my article in Sunday Times, 12 February, 2012.
The conflicting nature of the most recent data on
unemployment in Ireland paints the picture of an economy bouncing at the bottom
of the Great Recession. However, underlying trends in long-term unemployment
represent the single greatest threat to our growth potential in years to come.
The latest Live Register figures reflect two months of
consecutive and robust declines in the numbers drawing unemployment assistance.
In December 2011, seasonally-adjusted Live Register dropped 3,600 (the third
largest monthly decline since the beginning of the crisis). This was followed
by a 3,200 decline in January 2012, marking the fourth biggest downward
adjustment in the series since January 2008. Yet, January 2011 Live Register
total remains just 2.1% below the peak of 449,200 attained in September 2010.
Since 2009, net emigration form Ireland totalled some 76,400
and gross emigration amounted to 236,800 according to CSO. Absent the
officially registered emigration, Irish Live Register would have been closer to
522,900 in January 2012. In other words, the Live Register improvements now
conceal, not reveal, the true extent of joblessness and underemployment in the
country.
In contrast to the Live Register data, more direct evidence
on the job markets conditions is provided by the monthly Purchasing Managers
Indices (PMI) surveys published by NCB Stockbrokers. These make for a rather
depressing reading. January Services PMI employment conditions registered a
deeply contractionary 44.5, exacerbating declines posted in December 2011.
January marked the sharpest rate of decline in the services sectors employment
in 21 months. In Manufacturing employment index rose in December to 50.5 before
falling again to a contractionary 49.5 in January 2012. Manufacturing
employment index is now 4.1% below January 2011, marking the fourth drop in the
past five months.
These are the short-term signs of the labour market that
remains in continued distress. And further deterioration in the underlying jobs
and employment dynamics can be expected in the medium term.
Firstly, dramatic increases in the cost of laying off
workers under Budget 2012 are likely to translate into an overall stabilization
of the Live Register figures at a cost of the deterioration in the quality of
jobs (wages and bonuses, and promotional opportunities losses) and hours of
work as employers will be seeking cuts to their cost bases through lower pay
and fewer billable hours. Budget 2012 makes it less likely that employers will
be taking on new workers any time soon.
Secondly, the already rampant rise of the long term
structural unemployment will continue unabated. Here Ireland is in the league
of its own when compared to other European economies. In Q3 2011 our long-term
unemployment stood at 8.8% - the third highest in the EU27. Over the period
covered we have experienced a sharpest increase in long-term unemployment in
Europe.
Matters are even worse when it comes to very long-term unemployment – defined
as unemployment spells in excess of 24 months. With a rate of 5.4% in Q3 2011
we are now the second worst performer in Europe in terms of overall very
long-term unemployment rate, and we are the absolute worst in the EU27 in terms
of increases in very long-term unemployment since the beginning of the crisis.
Long-term unemployment exacts tremendous social and economic
tolls. International research shows that long-term spell out of work leads to
reduced life-time earnings (with estimates of up to 20% loss in earnings years
after the return to the job market), higher probability of future unemployment
(in some studies reaching over 2.3 times higher probability of unemployment
that average), and rapid and profound deterioration in human capital of the
unemployed. These effects also hold for those entering the workforce during the
periods of elevated long-term unemployment, such as the current Irish
graduates.
In today’s environment, rising long-term unemployment in
Ireland, threatens to reinforce already adverse future trends in productivity
growth. A study by the European Commission from 2006 has shown that across
EU27, over the next 25-30 years, ageing workforce will require greater use of
skills-driven productivity growth. The last thing we want is to lose the skills
of the current generations of young workers and students to long-term
unemployment.
In terms of timing of the policy responses to the long-term
unemployment, therefore, it is critical that we do not delay the necessary
structural reforms.
Most of the research on the policy solutions to this problem
is focused on the structural and institutional aspects of the labour markets. A
number of recent studies from the UK, Italy, and the US, as well as more
broadly-focused studies across the advanced economies show that long duration
strong unemployment protection, and high cost of hiring and laying off workers,
along with rigid systems of wage setting can act as structural barriers to
dealing with the long-term unemployment. This point has been most recently
flagged in the case of Ireland by the OECD report from June 2011. High minimum
wage and strong collective bargaining have been linked to segmentation of the
labour force and increased job instability for the younger and less-skilled
workers. Systemic reforms of social welfare and wages-setting mechanisms are clearly
an extremely painful, but necessary part of the comprehensive solution.
On the enabling side of the policy equation, the focus
should be on enhancing the human capital of the unemployed and incentives for
private sector jobs creation, not public investment-driven policies.
Immediate labour market measures should be developed for the
long-term younger unemployed. The Government, consistent with the advice from
the IMF and OECD is pursuing so-called active labour market programmes in this
area. These are primarily represented by the ‘push’ policies designed to force
young people off the unemployment benefits and into state-run training
programmes. According to the Nobel Laureate James Heckman training schemes
designed to de-list people from the unemployment rosters had zero effect on
labor markets outcomes in the 1990s. More recent research for European
countries experiences prior to 2008 confirms the same. In Ireland the real
impact of FAS programmes on long-term unemployment both before and during the
crisis has been negligible.
OECD data very clearly shows that Ireland spends more than
the Nordic countries as well as high income EU countries on direct jobs
creation and state training. In total, Ireland spent 0.87% of GDP or 1.10% of
GNP in 2010 on all active labour markets programmes, compared against 1.06% in
the Nordic countries and 0.70% in the rest of the high income EU states. It is
clear that we are simply not getting a good value for money out of this
expenditure.
Instead of relying on active labour markets programmes
alone, Ireland should focus on facilitating formal education access for
long-term unemployed, especially to undergraduate and MSc programmes closely
aligned with business and industry interests and featuring large component of direct
industry-related teaching. Retraining grants and supports can be linked with
mobility grants to assist mobility of those moving off unemployment benefits.
For the very young at-risk of future unemployment, financial
incentives to stay in school can be developed via social welfare systems.
There is strong evidence to support the view that private
sector jobs creation can be assisted through carefully targeted tax breaks and
deferrals. These require extremely close monitoring, strict conditionality and
enforcement, while assuring that there is no older workers displacement.
Another significant measure would be to suspend minimum wage for all workers
under-25 years of age, but this policy cannot be expected to generate
sustainable, higher quality jobs.
Reducing USC rates for self-employed below those for PAYE
workers to reflect the reality of their restricted access to social benefits
would provide some support for early-stage entrepreneurship and skills-based
self-employment.
The last thing the Government should do in the current
environment is to use scarce taxpayers cash on direct physical capital
investment as such measure would subsidise capital-intensive, not
skills-enhancing activities which will cease the minute Government cash dries
up once again.
Both the IMF and the OECD provide very clear-cut suggestions
as to the core composition of the structural labor markets reforms based on
three pillars: welfare reforms, labour markets reforms and activation systems
enhancement. Augmenting these with more direct measures to incentivise private
sector jobs creation mentioned above would be a net benefit in combating
long-term unemployment.
Table: Spending on active labour market programmes, 2010, %
of GDP
|
|
Ireland (GDP)
|
Ireland (GNP)
|
Nordic Countries
|
Other OECD Europe
|
OECD non-Europe
|
|
Public employment
service and administration
|
0.18
|
0.23
|
0.30
|
0.17
|
0.07
|
|
Training
|
0.37
|
0.47
|
0.26
|
0.22
|
0.09
|
|
Direct job creation
|
0.26
|
0.33
|
0.03
|
0.08
|
0.05
|
|
Other active
measures
|
0.06
|
0.08
|
0.46
|
0.23
|
0.07
|
|
Active Labour Market
Programmes, total
|
0.87
|
1.10
|
1.06
|
0.70
|
0.28
|
Source: OECD, Employment Outlook 2011, table 3.2
Box-out:
As the farcical show of Greek negotiations and austerity
talks continued its merry-go-round through this week, the ECB has caused some
excitement by opening up the discussion on allowing some writedowns of the
Greek bonds it holds. The EFSF bonds swap would see ECB converting Government
bonds the Central bank bought in the markets, for higher rated EFSF bonds,
writing down its purchase discount, which in the case of Greek bonds stands
around 31% of the face value of debt bought. The move has been gathering
momentum and driving the bond prices up since the mid-week in a hope it will be
extended to other peripheral bonds. Yet, no one in the markets seemed to notice
a simple paradox. In order to create any real lasting effect on bond yields,
such monetization would require a de facto injection of hundreds of billions in
cash into the Euro area economy. The upside of this would be further cheapening
of the credit for the peripheral states. The downside will be an even greater
liquidity trap via EFSF and a sharp rise in the future interest rates on Euro
denominated debt of the ordinary households and companies. With 4-4.5% ECB
rates on offer and double-digit retail rates on banks loans, ECB would be
robbing Paul and Jane to pay off Governments across the EU weakest states. This
we now call Europe’s greatest hope for salvation?
