26/11/2014: QNHS Q3 2014: Long-Term Unemployment

As usual with QNHS release, I will be covering a number of various angles relating to the latest unemployment data in a number of posts.

Let's start with duration of unemployment.

Overall, some good news. Official unemployment numbers fell 13.2% y/y in Q3 2014 (a decline of 37,400) for all duration categories. However, the rate of decline has moderated in Q3 compared to Q2. In Q2 2014 y/y drop in unemployment was 15.4% (down 46,200), which means that Q3 unemployment decline was 19% lower than the same y/y decline in Q2.

Across all demographic groups, unemployment with duration of less than 1 year dropped 9.9% y/y in Q3 2014 (a decline of 11,300). Again, this is good news. And again the good news are slightly moderated by the fact that the rate of decline has slowed down in Q3 compared to Q2 when unemployment of duration less than 1 year declined by 14.9% (down 18,200).

Long-term unemployment (1 year and longer) across all demographic groups was down 15.7% in Q3 2014 (down 25,900). This is excellent news in general as long-term unemployment is the hardest to shift. However, the rate of decline in long-term unemployment was also slower in Q3 2014 than in Q2 2014. Another good news is that the decline in long term unemployment was concentrated in the middle-age cohorts of 25-44 year olds where long term unemployment dropped by 17.7% y/y in Q3 2014 (down 15,800).

Key relative stat here is the relative share of long-term unemployed in total pool of the unemployed. This is illustrated in the chart below:

The chart shows several interesting trends:

• Overall share of long term unemployed amongst all unemployed has been trending down since the crisis period peak reached in Q1 2012 (63.5%) and currently it stands at 58.0%. The trend, however, is rather shallow;
• The shallow nature of the trend in long term unemployment as a share of total unemployment is driven by one group: those aged 25-44.
• Contrasting this, there has been a roughly volatile and sharply declining trend in long-term unemployed share of total unemployment for those aged 15-24 years of age. Much of this decline is, however, driven by the changing nature of our unemployment benefits system, emigration and state training programmes, rather than jobs creation.
• A worrying trend is for the demographic of 45 years of age and older. Here, there is an effectively flat trend in the share of long-term unemployed relative to total number of unemployed. Q3 2014 is showing a decline in this share to 69.1%, but that is bang on comparable to Q1 2014 share and is almost identical to 69.3 share in Q3 2013.

The last bit is worth highlighting a little more. As chart below shows, we are still on a rising trend in terms of the 45 year olds and older cohorts as proportion of all unemployed by duration:

In other words, we are facing a big problem in dealing with older unemployed and especially with older long-term unemployed.

Two tables below summarise the main results for changes in y/y terms and compared to Q1 2011.

30/8/2014: Irish Unemployment: The Plight of Long-Term Unemployed Older Workers

Some blogposts based on the latest QNHS data for Q2 2014 are due next, so to start with:

Duration of Unemployment in Ireland:

Two tables below summarise y/y and current on Q1 2011 (tenure of the present Coalition Government) changes in unemployment by age groups and duration of unemployment.

Couple of things worth mentioning (keep in mind, analysis of other aspects of unemployment are to follow, so we are focusing here on duration of unemployment):

1. Overall unemployment declined. This is good news, albeit not very new nor very interesting.
2. Y/y there were more significant declines in long-term unemployment for all those in the labour force (year on year, down 16.3% for those unemployed 1 year and over as opposed to a decline of 15.4% for those in unemployment in general). 
3. There were comparable declines in unemployment compared to Q1 2011 for those in long-term unemployment (down 17.2%) as for all unemployed (down 17.3%).
4. Caveat to (2) and (3) above: while these are good numbers, longer term unemployment declines are more heavily influenced by drop outs from the workforce than other durations.
5. In year-on-year terms, 15-24 years old have performed significantly better than average in terms of declines in unemployment of any duration and somewhat better than average in terms of declines in long-term unemployment. This suggests that some component of the current younger long-term unemployed is still structural - and cannot be easily removed by switching them into either education, training or into new jobs. Younger long-term unemployed also performed better than average for their reference group in terms of current levels compared to Q1 2011. This suggests that there have been some successes in shifting younger people off unemployment and longer-term unemployment too. Which is good news.
6. In year-on-year terms, mid-age group of long-term unemployed outperformed the average in terms of declines in unemployment (-20.9% against -16.3% average). But overall declines in unemployment in this group are basically around average (-15.8% against -15.4% for the overall group). Things are better for this category of workers both in short and long-term unemployment when compared to Q1 2011. Again, this is good news.
7. Bad news are for the category of workers 45 years of age and over. Why? In year-on-year terms, their unemployment rates declined less than across all age categories (-11.8% for all 45+ years of age against -15.4% for all workers) and in comparison to Q1 2011, their unemployment levels are higher (+2.7% for all 45+ years of age against -17.3% for all workers). Even worse news are for the long-term unemployed workers of age 45 and over: their unemployment rates declined much less than across all age categories (-8.1% for all 45+ years of age against -16.3% for all workers) and in comparison to Q1 2011, their unemployment levels are significantly higher (+14.4% for all 45+ years of age against -17.2% for all workers). This is the bad news: older workers are becoming increasingly less and less employable and the jobs being created in the economy, as well as training and activation schemes made available by the state are not working for this group.

Thus, overall, share of longer-term unemployed is declining, but remains still very high, while share of the long-term unemployed in the older age cohort of workers is rising:

The problem of long-term unemployment is bad enough - unemployment of duration in excess of 6-12 months has very long-term effect on employability of the workers, their skills, their psychological well-being, but also permanent effect on their wages and the probability of future jobs losses spells, and so on. The problem of long-term older workers is worse. Workers left without the job for a year or so, whilst in their older age are facing much greater barrier to re-entry into the workforce and suffer much more significant losses to their pensions, health status and social standing than their younger counterparts. They are also much harder to re-train and up-skill, so activation programmes generally designed to deal with the acute unemployment crises are not suitable for their needs. 

Stay tuned for more analysis of QNHS figures.

14/8/2014: Recessions and the Cost of Job Loss

Long-term unemployment has serious consequences in terms of

1. Reducing life-time earnings, including post-unemployment spell earnings;
2. Increasing life-time probability of future unemployment spells; and
3. Carrying severe costs in terms of reduced health, quality of life, mental health and social wellbeing.

This far we know. We also know that:

• Long-term unemployment effects start kicking in at around 3-6 months spell, rather than conventionally-measured 12 months spell
• Long-term unemployment is a problem most commonly associated with recessions; and
• Recessions-linked unemployment impacts those who have held the job prior to unemployment spell and those who are just starting their careers, with the latter suffering more significant effects of unemployment than the former.

A recent (December 2011) study by Davis, Steven J. and von Wachter, Till, titled "Recessions and the Cost of Job Loss" (NBER Working Paper No. w17638: http://ssrn.com/abstract=1967372) looks are the evidence on "the cumulative earnings losses associated with job displacement, drawing on longitudinal Social Security records for U.S. workers from 1974 to 2008."

The findings are striking:

• "In present value terms, men lose an average of 1.4 years of pre-displacement earnings if displaced in mass-layoff events that occur when the national unemployment rate is below 6 percent." So when national unemployment rate is close to frictional (or voluntary or alternatively when employment is close to full-employment rate - in the U.S. case around 5 percent), losing one job in large-scale unemployment generating event is bad. 
• But, "they lose a staggering 2.8 years of pre-displacement earnings if displaced when the unemployment rate exceeds 8 percent." So rate of losses doubles for a 50% rise in unemployment.
• The authors also "…characterize how present value earnings losses due to job displacement vary with business cycle conditions at the time of displacement. For men with 3 or more years of prior tenure who lose jobs in mass-layoff events  at larger firms, job displacement reduces the present value of future earnings by 12 percent in an  average year. The present value losses are high in all years, but they rise steeply with the  unemployment rate in the year of displacement. Present value losses for displacements that occur in recessions are nearly twice as large as for displacements in expansions. The entire  future path of earnings losses is much higher for displacements that occur in recessions. In short,  the present value earnings losses associated with job displacement are very large, and they are highly sensitive to labor market conditions at the time of displacement." Now, do tell me how on earth can we expect our pensions systems to be solvent in the future, following the Great Recession, given they were already insolvent prior to the crisis and given the effects of jobs losses on future earnings are so devastating?!

The authors "also document large cyclical movements in the incidence of job loss and job displacement and present evidence on how worker anxieties about job loss, wage cuts and job opportunities respond to contemporaneous economic conditions." Specifically they find that "…the available evidence indicates that cyclical fluctuations in worker perceptions and anxieties track actual labor market conditions rather closely, and that they respond quickly to deteriorations in the economic outlook. Gallup data, in particular, show a tremendous increase in worker anxieties about labor market prospects after the peak of the financial crisis in 2008 and 2009. They also show a recent return to the same high levels of anxiety. These data suggest that fears about job loss and other negative labor market outcomes are themselves a significant and costly aspect of economic downturns for a broad segment of the population. These findings also imply that workers are well aware of and concerned about the costly nature of job loss, especially in recessions."

Here's a chart to illustrate the empirical dynamics of earnings losses due to job loss.

14/6/2014: Industry vs ICT Services: Employment in Ireland

Changes in Industrial vs ICT services employment have been dramatic over the recent years. In the decade from 2003, Ireland gained 18,250 new jobs in ICT services and lost 63,425 jobs in Industry (excluding construction). This is just based on annual averages.

In Q1 2014 compared to Q1 2003, there were 19,100 new jobs added in ICT Services and 66,800 jobs lost in Industry.

Here's the problem:

1. ICT jobs involve hiring of foreign staff and intra-company transfers from abroad, Industry jobs involve more indigenous workers;
2. Both types of jobs require specialist skills, but transferability of these skills across various employers is much lower in Industry than in ICT Services, so a job lost in Industry is more likely to lead to long-term unemployment than a job lost in ICT
3. Workers in industrial employment are more likely to be older, compared to workers in ICT Services, which means that their retraining for new careers is less likely and their debt and family exposures are more likely to be significantly larger than for ICT Services workers

17/5/2014: Long-term unemployment: Sticky & Alarming

Things are pretty bad on the long-term unemployment front in Ireland. I covered this earlier here: http://trueeconomics.blogspot.ie/2014/05/1552014-innovation-employment-growth.html and here: http://trueeconomics.blogspot.ie/2014/05/1552014-jobs-employment-lot-done-more.html

But another look shows some truly dire comparatives.

Take long-term unemployed as proportion of all unemployed - you get two insights:

1. The proportion is rising. In Q3 2013 it was 58.4% and in Q4 2013 it rose to 61.4%. That's right, more than 6 out of 10 unemployed have been jobless more than a year, continuously. We do not know those who have been jobless more than 6 months (the cut-off point beyond which some research starts showing long-term deterioration in skills and aptitude).
2. The proportion is sticky in the long run - it has been above 50% since Q3 2010 and above 56% since Q4 2010. Un-yielding. 

The second bit relates to the proportion of long-term recipients of LR supports - this too yields two conclusions:

1. It is rising as well: up from 45.4% in Q4 2013 to 45.8% in Q1 2014.
2. And it is on a rising trend over time.

But here's a damning thingy: all this long-term unemployment sustains our 'productivity' gains and competitiveness 'improvements': http://trueeconomics.blogspot.ie/2014/05/1652014-competitive-sports-of.html

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.

13/2/2012: Sunday Times 12/2/2012: The perils of long-term unemployment

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?

30/1/2012: Irish Long-term Unemployment Saga

Unemployment figures, by age - distinguish youth and adult unemployment - have been preoccupying many analysts in recent weeks. Loads of media attention has been paid - internationally, if not in Ireland - to the plight of youth unemployment. In the next several posts, I will take a closer look at the data for EU27, including Ireland. All of the data comes courtesy of the Eurostat and covers the latest available period Q3 2011.

First, let's take a look at long term unemployment (defined as unemployment spell of 12 months or more) and very long-term unemployment (defined as 24 months or more).

Table below summarizes the data:

As you can see, we are not exactly a good performer. Prior to the crisis, Irish long-term unemployment averaged just 1.4% of the active age population - 23rd lowest in the group of EU27 plus Norway. In Q3 2011 our long-term unemployment stood at 8.8% - the third highest in the sample of 28 states. Over the period covered we have experienced an increase in long-term unemployment of 7.4 percentage points - the steepest rise in the EU27+Norway.

Matters are even worse when it comes to very long-term unemployment, where our rate has moved from  0.7% average for Q3 readings pre-crisis to 5.4% in Q3 2011 - an increase of 4.7 percentage points. Only Slovakia (6.0%) is worse performer than Ireland in terms of overall very long-term unemployment rate and we are the absolute worst in the EU27 + Norway group in terms of increase in very long-term unemployment.

Here is a chart to illustrate some of the above:

\Broken down by gender:

Long-term unemployment rates for men and women:

Ireland used to rank 22 in the EU 27+Norway in the size of its long-term unemployment pool amongst the males prior to the crisis. By Q3 2011 we had the highest rate of male long-term unemployment. We fared much better in terms of long-term female unemployment, moving from the lowest unemployment in the sample of countries prior to the crisis to 9th highest position. However, in both male and female long-term unemployment, Ireland experienced the largest and second largest, respectively, increases during the crisis.

Things are even worse for Irish very long-term unemployed figures. Prior to the crisis, very long term unemployment amongst Irish males averaged 1.0% (22nd highest in the EU27+Norway). In Q3 2011 that number rose to 7.5% (the highest in the EU27+Norway). This increase was the largest in the sample of countries over the period.

Very long-term unemployment amongst the females in Ireland averaged just 0.4% in pre-crisis period - third lowest in the EU27+Norway sample. In Q3 2011 this rose to 2.4% - 10th highest reading in the sample. Ireland's rate of increase in female very long-term unemployment was the fastest in the EU27 + Norway group of countries.

In the next post we will take a look at the unemployment figures by age.

Turning Unemployment into Work

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

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

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

Single non-earner, 1 child:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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