4/10/20: Technological Deepening Is Coming for Our Jobs

 

In my recent article for The Currency (link here: https://trueeconomics.blogspot.com/2020/09/my-recent-article-on-potential-long.html), I argued that COVID19 will act as an accelerator of technological capital deepening in the modern economies, with a resulting faster displacement of workers (including highly skilled ones) by technology. 

McKinsey survey of the developing trends in businesses strategic responses to the pandemic confirms my hypothesis:

Per above, across all sectors, and (peer charts below) across specific sectors, businesses are planning to prioritize deployment of technology in addressing long-term change in response to the current pandemic. 

McKinsey state that "Fifty-five percent of leaders anticipate that at least half of their organization’s workforce will be fully or partially remote postcrisis. While the expectations vary widely by industry—from 69 percent predicting this level of remote work in technology, telecommunications, and media to 43 percent in advanced industries—even in the industries where manufacturing, patient care, and sales transactions often require people at offices, stores, plants, and other company facilities, a significant portion of the workforce may be partially or fully remote." Source: https://www.mckinsey.com/business-functions/organization/our-insights/the-need-for-speed-in-the-post-covid-19-era-and-how-to-achieve-it. And "Our survey results show that executives are focused on three courses of action ... making good decisions more quickly, improving communication and collaboration, and making greater use of technology."

26/9/20: Workers Should Brace Themselves for the post-COVID19 New World

 

My recent article on potential long-term impacts of COVID19 pandemic on corporate development and investment strategies for The Currency: https://www.thecurrency.news/articles/24259/workers-should-brace-themselves-things-will-only-get-worse. 

6/5/20: H1B Visas and Local Wages: Undercutting Human Capital Returns

The Economic Policy Institute published an interesting piece of research on the links between H1B visas and lower wages paid by the U.S. employers for key skills: https://www.epi.org/publication/h-1b-visas-and-prevailing-wage-levels/. As far as I can see, the report does not cover academic faculty employment, but it does cover data from universities and other non-profits.

The report is worth reading.

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."

30/11/18: Ireland’s Dependency Ratio Problem?

Ireland seems to have a twin dependency. or rather a triple dependency problem:

• Younger population means larger share of population is either below the working age or in education;
• Older population largely working less in their post-retirement age due to a number of factors, such as family/household work (‘grandparents duties’ in absence of functional childcare and early education systems), and tax effects (low thresholds for the upper marginal tax rate application act as disincentive to supply surplus labor over and above retirement income), plus the workplace practices and regulations that restrict post-retirement age work; and
• Working-age adults in large numbers drawing various forms of allowances (labor force participation rate being low for Ireland despite a relatively benign unemployment statistics).

All of which means that the aggregate (and very broad) dependency ratio for Ireland is yet to recover from the decade-old crisis, and is below that for other small, open economies, for example, Iceland:

The latter observation was true before the crisis, but the onset of the GFC and the Great Recession have pushed Ireland’s employment to population ratio to such dire lows that the country is yet to recover from its woes. Iceland recovered its pre-crisis levels of employment to population ratio back in 2016. It also endured much less pronounced impact of the crisis in terms of ratio decline (peak to trough) and duration of the peak-to-peak cycle. Ireland is still climbing out of the mess, and the rate of recovery is expected to slow down dramatically in 2018 (based on the IMF data).

While many observers and analysts are quick to discount this ratio, the reality is that economy’s resilience to shocks, its productive capacity today (and, via on-the-job training, learning by doing and other forms of career-linked investments in productivity growth, its future capacity) are determined by how many people work in the economy per capita of population. The lower the ratio, the less income producing capacity the economy has, the lower the absorption capacity of the economy in the face of adverse shocks.

20/6/18: Irish Labour Force Participation Rate: Persistency of a Problem

With the latest CSO data reporting on labour force participation figures for 1Q 2018, time to update the chart showing secular decline in the labour force participation rate in the country since the start of 2010:

As the chart above shows, despite low and falling unemployment, Irish labour force participation rate remains at the lows established at the start of 2010 and is not trending up. In fact, seasonal volatility in the PR has increased on recent years (since 1Q 2016), while the overall average levels remain basically unchanged, sitting at the lowest levels since the start of the millennium.

Taking ratio of those in the labour force to those outside the labour force as a proximate dependency indicator (this omits dependency of children aged less than 15), over 2000-2004 period, average ratio stood at 1.685 (there were, on average, 1.685 people seeking work or employed for each 1 person not in the labour force). This rose to 1.895 average over 2005-2009 period, before collapsing to 1.630 average since the start of 2010. Current ratio (1Q 2018) sits at 1.600, below the present period average.

While demographics and education account for much of this, overall the conclusions that can drawn from this data are quite striking: per each person staying out of the labour force for various reasons, Ireland has fewer people working or searching for jobs today than in any comparable (in economic fundamentals terms) period.

24/3/18: Dysfunctional Labour Markets? Ireland’s Activity Rates 2007-2016

Having posted previously on the continued problem of low labour force participation rates in Ireland, here is another piece of supporting evidence that the recovery in unemployment figures has been masking some pretty disturbing underlying trends. The following chart shows labour force Activity Rates reported by Eurostat:

Note: per Eurostat: "According to the definitions of the International Labour Organisation (ILO) the activity rate is the percentage of economically active population aged 15-64 on the total population of the same age group."

Ireland’s showing is pretty poor across the board. At the end of 2016, Irish labour force activity rate stood at 69.3%, or 16th lowest in the EU. For Nordic countries, members of the EU, the rate stood at 71.2, while for Norway, Switzerland and Iceland, the average rate was 78.2.

Over time, compared to 2007-2008 average, Irish activity rate was still down 1.6 percentage points in 2016. In the Euro area, the movement was up 2 percentage points. Of all EU countries, only two: Cyprus and Finland, posted decreases in 2016 activity rates compared to 2007-2008 average.

For an economy with no pressing ageing concerns, Ireland has a labour market that appears to be dysfunctionally out of touch with realities of the modern economy. In part, this reflects a positive fact: Ireland sports high rates of younger adults in-education, helped by our healthy demographics. However, given the structure of Irish migration (especially net immigration of the younger skilled workers into Ireland) and given sky-high rates of disability claims in Ireland, the low activity rate also reflects low level of labour force participation. In this context, younger demographic make up of the country stands in stark contradiction to this factor.

According to Census 2016, "There was a total of 643,131 people with a disability in April 2016 accounting for 13.5 per cent of the population; this represented an increase of 47,796 persons on the 2011 figure of 595,335 when it accounted for 13.0 per cent of the population." (Source: http://www.cso.ie/en/media/csoie/newsevents/documents/census2016summaryresultspart2/Census_2016_Summary_Results_%E2%80%93_Part_2.pdf) However, "Of the total 643,131 persons with a disability 130,067 were at work, accounting for 6.5 per cent of the workforce. Among those aged 25-34, almost half (47.8%) were at work whereas by age 55 to 64 only 25 per cent of those with a disability were at work." Another potential driver of low economic activity rate in Ireland is the structure of long term care within the healthcare (or rather effective non-existent structure of such care), pushing large number of the Irish people of working age into provision of care for the long-term ill relatives.

Here is the OECD data (for 2016) on labour force participation rates:

Source: https://data.oecd.org/emp/labour-force-participation-rate.htm.

2/7/2014: Live Register by Nationality: June 2014 and Q2 2014

In the previous two posts (linked here) I covered top level data on Live Register for June 2014, and the Government "Score Card' comparatives between Q2 2014 and Q1 2011 when the current Coalition came to power. This post covers some details relating to foreign nationals on Live Register.

As of June 2014, there were

• 398,813 people officially on the Live Register (in other words, excluding those who received Live Register supports but were enrolled into State Training Programmes). This marked a decline of 8.39% y/y
• Of the above, 331,463 were Irish Nationals, representing 83.1% of total Live Register counts. Year on year, June 2014 numbers of Irish Nationals on LR is down 8.12% which is less than overall decline in the LR. A year ago, Irish Nationals represented 82.9% of total LR counts. So proportionally, Irish Nationals are now slightly more prevalent on LR than a year ago.
• In June 2014, there were 67,350 non-Irish Nationals on the LR, representing 16.9% of the total LR counts. This represents a decline of 9.73% y/y. A year ago in June 2013, non-Irish Nationals represented 17.1% of the LR.
• 15,034 UK nationals were on LR in Ireland in June 2014, representing a y/y decline of 10.0%, the second sharpest drop of all nationalities groups.
• There were 3,751 EU15 (ex-Ireland & UK) nationals on the LR in June 2014, virtually unchanged (up on 3,750) on June 2013.
• There were 36,772 Accession States (EU-12) nationals on the LR in June, representing a decline of 9.5% y/y. In June 2014, nationals of the Accession States accounted for 9.2% of the total LR counts, down from 9.3% in June 2013. In other words, proportionally, the numbers of Accession States nationals on LR have dropped more significantly than the decline in LR itself. This category posted the third steepest decline in LR numbers.
• Non-EU nationals listed on LR amounted to 11,793 as of June 2014, a decline of 12.8% on June 2013. Proportionally, they accounted for just under 3% of the LR total counts in June 2014, down slightly on just over 3.1% in June 2013. This category posted the overall steepest rate of decline in LR numbers y/y.

Charts to illustrate:

A table below summarises changes in quarterly averages terms for Q2 2014:

This largely confirms the same observations made about June 2014 figures.

2/7/2014: Live Register: Changes on Q1 2011 & Government 'Score Card'

In the previous post I covered Live Register (top numbers) for June. Here, as promised, a sort of 'Score Card' for the Government tenure period - looking at the LR performance over the period from Q1 2011 through Q2 2014. This is summarised in the table below:

Note one simple exercise, taking the rate of improvement in figures over either 3 years and a quarter (entire tenure of the Government) or over the last 12 months (quarterly averages basis), we can look at the number of years we are still away from getting the LR and its underlying components to some sort of a 'norm' (selected as the average of 2007-2008 period). Two things are evident from this exercise:

1. The task ahead is still awfully large and in no case are we out of the storm until around 2019-2020; and
2. The task is being made easier in recent months as things have been improving more rapidly

This confirms my earlier analysis that the current crisis does not appear to be as easily solvable as the one of the 1980s (you can see some of this here).

It would not be fair to criticise this Government for the problem of unemployment. And it would be wrong not to recognise the fact that the numbers are improving and the rate of improvement has accelerated in the last 18 months. Still, noting the caveats to the improvements that I cited in the earlier post on this subject, and considering the effect of State Training Programmes on LR (the cornerstone of Government labour market policies endorsed fully by the Troika) there is more of this road yet to travel than what has been marked over the last 3 years.

2/7/2014: Live Register: June 2014

Live Register figures for June 2014 are out today, so here are some updates.

Seasonally un-adjusted LR stood at 398,813 in June 2014, which is down 8.39% y/y down 36,544. In May 2014 the LR was down 7.81% y/y so June marks an improvement in the rate of Live Register declines.

Factoring in participants in State Training Programmes, total number of individuals in receipt of Live Register supports in June 2014 was 473,700 which is 5.68% lower (28,521) than in June 2013. The rate of decline in total Live Register Recipients numbers moderated in June, since in May 2014 it fell 6.98% y/y.

Chart to illustrate:

June marked the slowest rate of LR declines (when factoring in State Training Programmes participants) since February 2014. However, since December 2013, the annual rates of decline in LR+STP numbers have run above 5%, every month, against average 2.57% declines in January-November 2013.

On the other hand, official LR declines hit record in June, dropping 8.39% y/y, the steepest rate of annual decline since the crisis began.

All of the above are positives, but subject to two caveats:

1. We do not know how much of the LR reduction is down to emigration
2. We do not know how much of it is down to exits from the labour force.

Data for labour force itself comes with a quarterly lag, so all we have to go by currently is Q1 2014 figure, when the labour force rose to 2,146,300 compared to 2,137,500 in Q1 2013 - an increase y/y of 8,800. Rising net labour force could have come from younger workers coming into the LF for the first time (some of them are not finding jobs, some are) and it can mean that older workers who exited the LF are coming back. We do not know net drivers for the 8,800 increase, so we cannot speculate as to what effect on LR this has had.

What we do, however, know (with 1 quarter lag, again) is that LR recipients as share of labour force is still trending above 2008-present average and although it is coming down, the proportion remains stuck above 20%. 

2008-present average for LR+STP as % of labour force is 21.1%, current June 2014 reading is at 22.1% (assuming labour force for Q1 2014), and March 2014 reading was 22.0% - very close to June (March figure is based on Q1 2014 data, so it is more likely to be correct). In June 2013 this proportion was 23.1% and in March 2013 it was 23.9%, which means we have some improvement. However, we are still far from 1998-2007 average of 9.5%.

So the good news is: LR is down. Better news is: much of the decrease is not due to State Training Programmes. Bad news: there is still a lot of road left to travel before we get anywhere near normal levels of LR and the progress is not rapid.

Government 2011-present scorecard on LR - in the next post.

10/4/2014: The curse of Long-Term Joblessness

This is an unedited version of my Sunday Times column from March 30, 2014


The unemployment crisis has not passed unnoticed in many households. Ours’ is no exception. Back in 2008, for a brief period of time, both of us found ourselves out of jobs. Thankfully, the spell was very short-lived. Then, in 2011, over a couple of months, I was dusting out my CV for unplanned updates. Just a few days ago, I learned that this year I will not be teaching two of the courses I have taught over the recent years. It's part-time unemployment, again, and this time it is down not to the economic crisis, but to the senile EU 'labour protection' laws.

Yet, spared long-term unemployment spells and able to pick up freelance and contract work, our family is a lucky one. In contrast, many in Ireland today find themselves in an entirely different camp.

Per latest statistics, in February 2014, 180,496 individuals were officially in receipt of Live Register supports for longer than 1 year. Inclusive of those long-term unemployed who were engaged in state-run 'activation programmes' there were around 265,500 people who were seeking employment and not finding one for over a year.

Countless more, discouraged by the zero prospect of securing a new job and not eligible or no longer eligible (having run out of benefits and not qualifying for full social welfare due to total family income) for Live Register supports have dropped out of the workforce and/or emigrated. They simply vanished from the official statistics counts. By latest counts, their numbers can range around 250,000; half of these coming from emigrants who left the country between April 2010 and April 2013.


The numbers above starkly contrast with the boisterous claims by the Government that the economy has created some 61,000 new jobs in 2013. Looking deeper into the new jobs claim, there has been a tangible rise in full-time employment of roughly 27,000 in 2013. Which is still a good news, just not good enough to make a serious dent in the long-term unemployment figures.

Officially, year on year, long-term unemployment fell by 20,900 in Q4 2013. Accounting for those in activation programmes, it was down by around 18,200. Live Register numbers are showing even shallower declines. In 12 months through February 2014, total number of unemployment supports recipients fell 30,807. But factoring in the effect of state training programmes, the decline was only 7,364 amongst those on live register for longer than 1 year. Even more worrisome, since Q1 2011 when the current Government took office, through the first two months of 2014, numbers of the long-term recipients of Live Register support are up by 31,352.

Whichever way you look at the figures, the conclusion is brutally obvious: the problem of long-term unemployment is actually getting worse just as the Government and the media are talking about rapid jobs creation. More ominously, with every month passing, those stuck in long-term joblessness lose skills, aptitude and sustain rising psychological stress.

All of this adds up to what economists identify across a number of studies as a long-term or nearly permanent loss of economic and social wellbeing for workers directly impacted by the long-term unemployment.

However, long-term unemployment also impacts many more individuals than the unemployed themselves.

The lifetime declines in career paths and incomes traceable to the long-term unemployment are also found across the groups related to those without the jobs either via family or via job market connections. Researchers in the US, UK, Germany and Denmark have shown that long-term unemployment for one member of the family leads to a reduction in the lifetime income and pensions cover for the entire household. Studies have also linked long-term unemployment of parents to poorer outcomes in education and jobs market performance for their children.

The adverse effects of long-term unemployment also occur much earlier in the out-of-work spell than our statistics allow for. Whilst we consider the unemployment spells of over 1 year to be the benchmark for long-term unemployment, studies from the US and UK show that the adverse effects kick in as early as six months after the job termination. The US-based Urban Institute found that being out of work for a period in excess of six months is "associated with lower well-being among the long-term unemployed, their families, and their communities. Each week out of work means more lost income. The long-term unemployed also tend to earn less once they find new jobs. They tend to be in poorer health and have children with worse academic performance than similar workers who avoided unemployment. Communities with a higher share of long-term unemployed workers also tend to have higher rates of crime and violence."

This is a far cry from the Irish Government rhetoric on the issue of long term unemployment that paints the picture of relatively isolated, largely personal effects of the problem. Empirical evidence from a number of European countries, as well as the US and Australia shows that these effects are directly attributable to the unemployment spells themselves, rather than being driven by the same causative factors that may contribute to a person becoming unemployed.

Such evidence directly disputes the validity of the Irish Government policies that rely almost entirely on so-called 'activation programmes'. Activation programmes put in place in Ireland during this crisis primarily aim at providing disincentives for the unemployed to stay outside the labour market. Such programmes can be effective in the case where there is significant voluntary unemployment. Instead, in the environment with shortages of jobs and big mismatches between skills and jobs, policy emphasis should be on providing long-term supports to acquire necessary skills and empower unemployed to gradually transition into new professions, enterprises and self-employment.

In part, our state training programmes are falling short of closing the skills gaps that do exist in the labour markets. ICT and ICT support services training, as well as international financial services and professional services skills – including those in sales, marketing, back office operations - are barely covered by the existent programmes.

And where they are present, their quality is wanting. For a good reason: much of our training at best involves instructors who are part-time employed in the sectors of claimed expertise and are too often on the pre-retirement side of their careers, having already fallen behind the curve in terms of what is needed in the markets. In worst cases, training is supplied by those who have no proven track record in the market. Structuring of courses and programmes is done by public sector employees who have little immediate understanding of what is being demanded. We should rely less on the use of training 'specialists' and more on industry-based apprenticeships.

Many practices today substitute applied teaching in a quasi-educational programme with class-based instructions and formal qualification attainment for an hands-on, on-site engagement with actual employers. Evidence collected in Denmark during the 1990s showed that classroom-based training programmes significantly increase individual unemployment rates instead of decreasing them. The reason for this is that attainment of formal or highly specialised qualifications tends to increase individual expectations of wages offers post-programme completion, reducing the range of jobs for which they apply. This evidence in part informed the German reforms of the early 2000s that focused on on-the-job apprenticeship-based skills development. Beyond that, class-based training lacks incentives for self-advancement, such as performance bonuses and commissions.

Self-employment acts as a major springboard to new business formation and can lead to acquisition of skills necessary for full-time employment in the future. Currently, there is little training and support available for people who are considering self-employment. There are, however, strong disincentives to undertake self-employment inherent in our tax systems, access to benefits, and in reduced burden of legal compliance. One possible cross-link between self-employment training and larger enterprises' demand for contractors is not explored in the current training programmes. There are no available shared services platforms that can help self-employed and budding entrepreneurs reduce costs in the areas of accounting, legal and marketing.


Unless we are willing to sustain the indefinitely some 100,000-120,000 in long-term unemployment, we need to rethink of the entire approach to skills development, acquisition and deployment in this country.

Some recent proposals in this area include calls from the private sector employers groups to drop minimum wage. This can help, but in the current environment of constrained jobs supply, it will mean more hardship for families, in return for potentially only marginal gains in employment. Incentivising self-employment and contracting work, by reducing tax penalties will probably have a larger impact. Encouraging, supporting and incentivising real internships and apprenticeships - based on equal pay, commensurable with experience and productivity - will benefit primarily younger workers and workers with proximate skills to those currently in demand. Backing such programmes with deferred tax credits for employers, accessible after, say 3 years of employing new workers, will be a big positive.

In addition we need to review our current system of job-search assistance. For starters, this should be provided by professional placement and search firms, not by State agencies.

Finally, we need to review our current definition of the long-term unemployed to cover all those who are out of the job for longer than 6 months, as well as those who moved into unemployment fro, being self-employed.


This week, former White House economist Alan Krueger identified US long-term unemployment in the US as the "most serious problem" the economy faces right now. He is right. Yet, in the US, long-term unemployed represent roughly one third of all those receiving unemployment assistance. In Ireland, the number currently stands at almost two thirds. The crisis has not gone away. Neither should the drive for reforms.

Box-out: 

With the opening of the first Bitcoin ATMs in Dublin and with growing number of companies taking payments in the world's most popular crypto currency, the crypto-currency became a flavour of the week for financial press in Ireland.

The most hotly debated financial instrument in the markets, it is generating mountains of comments, rumors, as well as serious academic, industry and policy papers. Is it a currency? A commodity, like gold - limited in supply, unlimited in demand? Or a Ponzi scheme?

Few agree as to the true nature of Bitcoin. Bank of Finland denied Bitcoin a status of money, defining it as a commodity of sorts. Norway followed the suit, while Denmark is still deliberating. Sweden classified Bitcoin as 'another asset' proximate to art and antiques, the U.S. Internal Revenue Service - as property.The European Banking Authority is clearly not a fan, having ruled that "when using virtual currency for commercial transactions, consumers are not protected by any refund rights under EU law." In contrast, German authorities recognise Bitcoin as 'a unit of account' as do the French.

Financially, Bitcoin is neither a commodity nor a currency. Bitcoin does not share in any of the main features of commodities. You can't take a physical delivery under an insured contract. You cannot use it to hedge any other asset classes, such as stocks or other currencies. And it is not a currency because it has no issuer who guarantees its value. Nor can it feasibly serve as a unit of accounting and store of value, given extreme levels of price volatility.

Thus, one of the more accurate ways is to think of Bitcoin as a very exciting, interesting (from speculative, academic and practitioner point of view) financial instrument. For now, it shares some properties common to the dot.com stocks of around 1996-1998 and Dutch tulips ca 1620-1630, the periods before the full mania hit, but already showing the signs of some excessive investor confidence. So plant your seed with care.

5/3/2014: Broader Measures of Unemployment in Ireland: QNHS Q4 2013

Completing the coverage of Q4 2013 QNHS results for Ireland.

• First post covering detailed analysis of employment by sectors: http://trueeconomics.blogspot.ie/2014/02/2722014-employment-by-sectors-qnhs-q4.html
• Second post covering employment across broader sectors and categories: http://trueeconomics.blogspot.ie/2014/02/2822014-new-employment-across-broader.html
• Third post covering Participation and Unemployment Rates: http://trueeconomics.blogspot.ie/2014/02/2822014-participation-and-unemployment.html
• Fourth post covering duration of unemployment by age group: http://trueeconomics.blogspot.ie/2014/02/2822014-duration-of-unemployment-qnhs.html

Now, let's take a look at broader measures of unemployment.

Methodology note: CSO reports the following measures of broader unemployment:

• PLS1 indicator is unemployed persons plus discouraged workers as a percentage of the Labour Force plus discouraged workers. This indicator is broadly comparable to the previously published S1 indicator. In the nutshell, PLS1 = unemployed persons plus discouraged workers.
• PLS2 = PLS1 + Potential Additional Labour Force
• PLS3 = PLS2 + others who want a job, not available & not seeking for reasons other than being in Education and training.
• PLS4 = PLS3 + plus underemployed

In addition, I use CSO data from Live Register and emigration to add two more metrics:

• PLS4+STP: PLS4 + State Training Programmes Participant
• PLS4+STPE: PLS4 + State Training Programmes Participants + Emigration

So let's take a look first at labour force. The data is not seasonally-adjusted.

In Q4 2013 there were 2,163,000 people in labour force in Ireland, an increase of 19,600 year on year (+0.9%). A small increase, but a welcome one, suggesting that emigration is not offsetting demographic inflows of workers into the labour force. However, the level of labour force is still below Q4 2011 and is down 137,000 on pre-crisis peak. On average over the entire 2013, levels of labour force were 110,600 behind the pre-crisis period average levels.

As chart above shows, the greater challenge for us is the flat-trending labour force over the period of 2011-2013.

Table and chart below summarise changes in the broader measures of unemployment:

The key takeaway from the above charts and the table is shallower declines in the broadest measures of unemployment officially reported (PLS2-PLS4) compared to PLS1 and the adverse impact of 'sticky' State Training Programmes on the measure. It appears that these programmes are not moving workers out of unemployment fast enough.

Keeping in mind that Emigration is imputed only through April 2013 (we do not have official data beyond that), the PLS4+STP+E measure likely underestimates overall changes in broad unemployment.

Just how bad things are on overall unemployment front? With caveats to data and estimation errors, the above shows that in Q4 2013, 31.7% of Irish potential (including emigrants and state training schemes participants) labour force was either unemployed, underemployed, discouraged from seeking employment, not seeking employment for some reason other than being in education, toiling for free at Job Bridge and other fine 'activation' programmes or 'partying' abroad. Happy times...

That number, incidentally, is down from 32.5% in Q4 2012, but is still above 30.9 in Q4 2011.

18/2/2014: Wages and Employment: Irish labour market plight

This is an unedited version of my Sunday Times column from February 9, 2014.


In recent months, Irish Government has gone into an overdrive, producing various reports, scorecards and papers on the Irish economy. Much of this activity is a welcome sign that various Departments are starting at last to engage with the world beyond the halls of civil service and political establishment.

The most recent report card on the Irish economy, courtesy of the Department of Finance, presents an interesting read. The document provides an insight into Official Ireland's view of the future, with forecasts covering 2015-2018 medium-term priorities for the Government, including: managing public finances, focusing on jobs, and restructuring the financial system.

To those of us inhabiting the real economy, removed from the MNCs and Government finances, of key importance here are the objectives of "reviving domestic demand" and "increasing employment". The Department’s overarching framework for achieving economic growth in the economy rests on the assumption that over 2014-2016, both total domestic demand (sum of public and private consumption of goods and services and investment) and exports will be positive contributors to growth. In fact, domestic demand is forecast to add, on average, 1.2 percentage points to economic growth annually, accounting for more than half of the GDP expansion in 2014 and 2015 and over 40 percent of growth in 2016.

The Department of Finance vision of the future is a positive one, especially for the financially battered Irish households. Alas, it also reflects some potential contradictions – a sign of the overall dilemma inherent in our economy’s structure. For all the talk about recovery and regaining of our economic independence, Ireland is still facing years of dealing with the debt crisis as well as sustained fiscal austerity. Growing out of this predicament can only be achieved by pushing up exports. But this, in turn, requires moderation in production costs and, thus, suppression of domestic demand. As the 1990s showed, you can’t have both, growth in exports and growth in the domestic economy, until we erase the debt overhang.


By definition, increases in domestic demand can only come from either public or households' consumption and investment uplifts or both.

Growth in Government spending on both current and capital goods and services is not on the cards. In 2014 and 2015 Irish fiscal tightening will continue to reduce domestic demand. In particular, fiscal consolidation, as planned, will take 1.8 percent of GDP in 2014 and 1.1 percent of GDP in 2015. Thereafter, we are still set to face the so-called 'preventative arm' of the EU’s Stability and Growth Pact (SGP). Under the 2011 Six-Pack legislation amending the SGP, a number of fiscal rules will apply to Ireland, including the requirement to continue reducing structural imbalances by at least 0.5 of GDP per annum, plus the debt break mechanism designed to draw debt to GDP ratio down toward 60 percent benchmark over time.

Which means the households are expected to fund the fiscal adjustments in 2014-2015, and fiscal maintenance in 2016 and beyond. All while delevaraging own debts and paying for the banks deleveraging their loan books, without dipping into deposits which will have to remain high to sustain core banking sector performance metrics.

Meanwhile, the Department of Finance forecasts that Ireland's unit labour costs adjustments over 2008-2015 will total 21 percent, relative to the Eurozone average. This projection, turn, underwrites the forecast growth in our exports.

Just how the households of Ireland can be expected to deliver on all of this is anyone's guess. An even bigger guess is required to explain as to how all of the above financial pressures on Irish households can be dealt with while increasing private investment and consumption, e.g. growing domestic demand.


The answer to the above questions rests with the outlook for the labour markets and wages.

In 2013, Irish economy seen the return of growth in employment - the only significant bright spark on otherwise bleak economic horizon. Based on the latest data we have, in 12 months through September 2013, numbers in employment rose in all sectors in Ireland, with exception of Transport and storage, Administrative and support services, Public administration, and Health and social work. Non-agricultural employment rose by 33,000 and the bulk of new employment was generated in the jobs with 35 and higher average weekly paid hours. In fact, in Q3 2013 compared to Q3 2012, the number of people in employment more than 35 hours per week rose 52,500.

This means that employment growth is now beginning to support domestic demand growth.

The problem is that this support is coming off extremely low levels. Between 2008 and 2013, number of jobs with weekly work hours in excess of 35 hours has fallen 242,500. And gains in employment so far are still fragile. At current rates of growth, it will take us some 13 years to get back to the same levels of full-time employment. Of all sectors, only three are currently registering larger number of jobs than in 2007-2008 period: Accommodation and food, Information and communication, and Health.

And the latest Live Register figures released this week show that controlling for State Training Programmes participation, declines in the numbers on the Live Register remained rather static over the last 4 months.

With employment rising off low levels the other source for growth in domestic demand can be found in earnings. And, aptly, in recent months, there has been resurgence in political chatter about the need to raise wages.

In part, these calls are driven by wages dynamics during the crisis. As of the end of September 2013, average weekly earnings in Ireland were down across all sectors by EUR16.40 compared to the same period in 2012 and down EUR31.37 compared to 2008 average. However, earnings were up significantly in Information and communication: rising EUR40.28 per week on Q3 2012 and up EUR64.28 on 2008 levels. This is a sector with employment that is predominantly capturing foreign workers into new jobs. In turn, these workers have only tenuous connection to the domestic economy: they rarely invest in Ireland, do not save here and are more likely to spend money abroad than the long-term residents. In almost all sectors of the economy linked more directly to Irish resident workforce, earnings are still declining.

So employment might be growing, but wages are declining or stagnant. Which does not bode well for household incomes and, in return, for domestic demand growth story.

More importantly, earnings deflation or stagnation must continue if the Government projections for exports growth were to materialise.

The maths are further stacked up against the theory of domestic demand growth fuelled by wages rises. Given changes to taxes over recent years, a euro increase in wages from current levels for an average household will yield less than 50 cents in the gains in the disposable income. When juxtaposed against the non-discretionary spending, such as funding mortgages, this means that wages increases are not exactly an efficient path to growing domestic demand. Based on Central Bank data, average mortgage in arrears today is EUR190,372. Per CSO, average household income is around EUR61,000pa, once we adjust for unemployment. Which means that at current tax rates, a 1.5 percent increase in income (corresponding to average weekly earnings rising by EUR10.13 on their Q3 2013 levels) is not enough to offset a 0.25 percent rise in mortgage interest.

This week, we have seen the publication of the research paper showing that some 100,000 households in Ireland are unable to pay their mortgages despite having regular income from employment. That is roughly 63 percent of all mortgages in arrears.

Put simply, from economy’s point of view, it is more effective to raise and extend mortgages interest relief than attempt fuelling wages inflation. With ECB’s policy firmly geared toward lower rates, one might be excused thinking that interest rates increases are for now a distant prospect, but in 2013, house loans rates for outstanding mortgages in Ireland went up 0.1 percent compared to the same period in 2012, while rates of outstanding consumer loans were up 0.34 percent. Overall, these increases, suggest that just to keep up with the cost of funding our immense household debt overhang, households need to see wages increases of some 2.2-2.4 percent per annum. Unless you work in ICT, this is not on the books, given supply-demand imbalances in skills and jobs in this economy.

Which leaves us with only one sector where realities of supply and demand have little to do with pay and employment and where wages increases can be imposed by the state: the public sector. This is precisely where pressures to raise wages are currently emerging, driven by political, not economic considerations. With local and European elections approaching, Labour wing of the current Government is trying desperately to force the reversal of their slide in electoral approval ratings. Labour's traditional support base - the Unions - are happy to oblige, in return for concessions of value to their members.

The problem with this, however, is that in order to keep labour costs competitive on the aggregate, wages hikes in the public sector will require more wages ‘moderation’ somewhere else in the economy. Furthermore, with fiscal policy breaks still in the hands of the EU, increases in the lower skilled wages in public sector are likely to benefit incumbent employees at the expense of the newcomers. And if productivity growth in private sectors does not compensate for labour cost increases in public sector, we will be heading for new layoffs, slower jobs creation and, thus, contracting domestic demand.


Our economy is between a rock and a hard place. We are living through the slowly unfolding nightmare of the exports-led recovery – a recovery during which households’ earnings and employment growth are unlikely to reignite domestic economy any time soon. The only way this dilemma of wages vs exports can be resolved is if it is accompanied by a rapid reduction in household debt. But, of course, you won’t find that featuring anywhere in the Official Ireland glossy presentations or in Labour Party’s exhortations about the need for wages growth.

Box-out:
This week, Irish Spirits Association published the latest statistics on our whiskey sector. According to the association data, Ireland had only 4 registered distillers delivering gross value added to the economy of EUR568 million for all spirits produced. This compares against 108 distillers of whiskey alone, pumping out value added of ca EUR3,630 million in Scotland. Total exports in Ireland stood at 6.2 million cases per annum. Scotch exports were fifteen times that number. The figures highlight both a massive potential for Irish whiskey growth and a huge gap between our sector output and that of our next-door neighbours. Looking at the Scottish model, it is clear that Ireland’s decades-old policy of industrialising production in the whiskey sector has failed spectacularly. We need a new policy approach focusing on stimulating independent distilleries, catering to higher value-added premium segment of the market, and delivering rapid innovation with focus on high quality. Marketing efforts of our trade facilitation agencies are not enough.

29/8/2013: Some positives v negatives from QNHS data: Q2 2013

Latest QNHS figures from Ireland are encouraging. Actually, given much of the tough news on the front of employment and jobs creation prior, these are heart warming. Here are the headlines:

Employment:

• "There was an annual increase in employment of 1.8% or 33,800 in the year to the second quarter of 2013, bringing total employment to 1,869,900. This compares with an annual increase in employment of 1.1% in the previous quarter and a decrease of 1.3% in the year to Q2 2012." This is good. Employment is up against adverse demographic effects, which is good, but it is also up due to superficial effects of reclassifications of some categories (see warning below).
• Even better news: "Full-time employment increased by 21,600 or 1.5% in the year to Q2 2013 while part-time employment increased by 12,100 or 2.8% over the year." So levels of increase in full-time employment are outstripping increases in part-time employment, implying that average jobs pool quality is not declining anymore.
• This marks third consecutive quarter of q/q increases in employment: "On a seasonally adjusted basis, employment increased by 9,600 (+0.5%) in the quarter." There was a seasonally adjusted increase in employment of 9,000 (+0.5%) in Q1 2013 and 12,100 (+0.7%) in Q4 2012.
• Employment increases and decreases composition are not sending a good signal, with higher value-added sub-categories of employment up: "Employment fell in five of the fourteen economic sectors over the year... The greatest rates of decline were recorded in the Administration and support service activities(-7.9% or -5,000), Transportation and storage (-5.4% or -4,900) and Public administration and defence; compulsory social security (-4.5% or -4,500) sectors. The largest rates of increase were recorded in the Agriculture, forestry and fishing (+18.7% or 16,300) and the Accommodation and food service activities(+8.0% or 9,600) sectors. 
• Here is a warning shot on the above figures: "In the case of the Agriculture, forestry and fishing sector it can be noted that estimates of employment in this sector have shown to be sensitive to sample changes over time." So, wait... +16,300 'new' jobs in Agriculture etc are really old jobs reclassified... or at least a large share of these are... Oops.. Note that this exactly matches decrease in the 'Not in the labour force' category (-16,300 y/y) and this knocks out quite a bit of wind out of the 'jobs creation' figures sails...

Unemployment:

• "The seasonally adjusted unemployment rate decreased from 13.8% to 13.7% over the quarter while the number of persons unemployed fell marginally by 500 persons, again on a seasonally adjusted basis." This is news in so far it is 'official' QNHS reading, but we knew 13.7% figure back in May when we had the standardised rate of unemployment estimate from Live Register.
• "Unemployment decreased by 22,200 (-6.9%) in the year to Q2 2013 bringing the total number of persons unemployed to 300,700. This is the fourth quarter in succession where unemployment has declined on an annual basis." Which is good news, indeed, except, wait... what about the 16,300 'new' jobs in Agriculture, Forestry & Fishing flagged above? Marginal decline of just 500 in terms of q/q seasonally-adjusted unemployment is a poor reading, to be honest. Better than an increase, but still, very weak. This weakness suggests that the bulk of 22,200 declines in unemployment rosters is due to exits and reclassifications of workers, not due to jobs creation.
• "The long-term unemployment rate decreased from 9.2% to 8.1% over the year to Q2 2013. Long-term unemployment accounted for 58.2% of total unemployment in Q2 2013 compared with 61.8% a year earlier and 56.1% in the second quarter of 2011." What we do not know here is whether this decrease was due to exits from benefits or entries into jobs or move to state-run training programmes. I will do analysis on these later, so stay tuned.

Labour force participation:

• Good news: "The total number of persons in the labour force in the second quarter of 2013 was 2,170,700, representing an increase of 11,500 (+0.5%) over the year. This compares with an annual labour force decrease of 19,600 (-0.9%) in Q2 2012." 
• The above is a good bit of news and it is made even better when we consider that increases in labour force were driven by increased participation rather than by demographic effects. In Q2 2013 there was a negative demographic effect cutting -16,300 from the overall labour force. This was more than offset by "a positive participation effect of 27,800 on the size of the labour force over the year.
• There was "an increase in the overall participation rate from 60.1% to 60.5% over the year to Q2 2013." Which is excellent news.
• "The number of persons not in the labour force in Q2 2013 was 1,415,600, a decrease of 16,300 (-1.1%) over the year." This seems to be related to reclassifications into Agriculture, etc. sector.

To summarise:

We have some positive news above, but overall, numbers remain obscured by reclassifications, changes in composition and lack of clarity on flows in- and out- of unemployment. 

Analysis of broader measures of unemployment, more indicative of underlying quality and nature of changes in the aggregate figures, is to follow, so stay tuned.

15/4/2013: Bonus Culture: A model of social efficiencies in the presence of bonuses

The global financial crisis has exposed the absurd effects of short-termism when it comes to bonuses on long-term sustainability and efficiency of enterprises. However, the idea that bonuses can be effective in creating a compensation wedge over relatively standardised salary scales to reward performance and/or human capital (on the supply side of labour) and to provide competitive advantage to firms in attracting human capital (on the demand side of labour) is not necessarily out of touch with reality in many other sectors and occupations. Still, some worrying lessons that we should learn about the distortions introduced by bonuses from the crisis do apply to other sectors as well.

An interesting paper, albeit purely theoretical, titled "Bonus Culture: Competitive Pay, Screening, and Multitasking" by Roland Bénabou and Jean Tirole (NBER Working Paper No. 18936, April 2013) looked at "the impact of labor market competition and skill-biased technical change on the structure of compensation."

The authors found that "Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic under-incentivization of low-skill agents first decreases, then gives way to a growing over-incentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions."

Furthermore, "The extent to which [such a correction via bonus caps and income taxes] is achievable depends on how well the government or regulator is able to distinguish the incentive versus fixed parts of compensation packages, as well as on the distortions that may arise as firms try to blur that line or resort to even less efficient screening devices."

One issue with the study is that the model does not allow for heterogeneity between agents and between various sectors of economy. The authors acknowledge this much by stating that "…task unobservability may be less of a concern for some (e.g., private-equity partnerships) and more for others (large banks), but if they compete for talent the high-powered incentives efficiently offered in the former may spread to the latter, and do damage there. Heterogeneity also raises the question of the self-selection of agents into professions and their matching with firms or sectors, e.g., between finance and science or engineering."

Other shortcoming, also mentioned by the authors in their 'what can be done next' discussion is that in some  "settings in which high-skill workers become more valuable as firms compete harder for customers, for instance because the latter become more sensitive to quality."

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.