For those of you who missed my Sunday Times article, here is an unedited version, along with more detailed explanation of my calculations on effective earnings for welfare recipients as compared against those for people engaged in lower-skills work across Irish sectors.
In 1987, after years of gradual decay, Ireland’s economy was scarred by 17% unemployment, of which 10.5% was long-term – of duration over 1 year. What got Ireland out of this quagmire was a combination of drastic currency adjustments, contractionary fiscal policies and a doze of realism when it came to real wages and welfare benefits.
In contrast, so far in the current crisis, 18 months into exponentially rising dole queues, our Government has reduced itself to repeating a handful of old and obsolete clichés.
The first one is to evoke an assumption that our demographic dividend – the term used to describe our younger than EU average labour force – is going to carry us out of the current mess to new heights of growth in years ahead. The second one is to claim that because the onset of unemployment was a sudden one, it is, therefore, temporary in nature. ‘All’s going to be fine, folks, once America starts growing’, says our Government. Will it?
Take the ‘demographic dividend’ argument. It is true that we have a strong younger labour force. However, it is dangerous to assume that these workers are always going to remain in Ireland. In demographics, like in everything else, there is no such thing as a free lunch.
In particular, young worker’s propensity to stay in this country is a function of several variables all of which are under threat from our current policies. Young and highly skilled workers require an environment in which their careers are less constrained by the incumbents. Given that Irish regulations favour the length of tenure over actual and potential productivity as criteria for promotion, layoffs and hiring, this is an area of serious concern. While October 2008 – April 2009 rate of increase in unemployment amongst all Irish workers was 64.5%, for 25-34 year-olds it was 77.5%. To keep young workers in this country, we need to give up some of the tenure-based job security that our trade unions enshrined in labour laws.
Likewise, given a choice between living in countries with much lower income inequalities and in those where pay is linked to individual and sectoral productivity differentials – vast majority of our younger and more able workers prefer to build their careers in the New York, London or Sydney, not in Stockholm or Helsinki.
A corollary of this is that high minimum wage and social welfare rates, and rigid labour markets regulations act as a relative disincentive for highly skilled young workers to remain in Ireland. Higher minimum wage and social welfare benefits depress the premium to skills and aptitude that is collected by the young workers more than for older workers. Younger workers in Ireland already face lower tenure-linked wages, bringing their real consumption and wealth closer to those employed in low-skilled jobs and those who are not engaged in the labour force at all.
Table illustrates by taking an example of single parent in average and lower skills employment in Irish economy and comparing her against a person on social welfare. The current social welfare payments and benefits exceed lower grade workers’ earnings in all broad sectors of our economy, with the gap ranging between €1,423 per annum for production workers in industry overall to €2,006 per annum for lower grade workers in manufacturing.
See below for charts and explanationsThere is an added external threat to our younger labour force. As an open economy, with wage premia for younger workers rise in increasingly geriatric Germany, Italy, Belgium and other advanced economies, Ireland will face a simple choice – let our demographic dividend slip to other locations or create a more rewarding and meritocratic home market.
On the net, it is hard to make a case that our demographic advantage over older EU15 economies will automatically yield significant economic or social dividend in the near future.
The second major issue with our labour market policies relates to the recent increases in unemployment. Irish commentators and policy makers often take a simplistic view that the current bout of unemployment was unpredictable, concentrated in the construction sector and is a temporary feature of our economic landscape. Once growth returns, the thinking goes, some 250,000-300,000 of the 402,100 currently in receipt of unemployment assistance will go back to work. Happy times are just around the corner, as our Taoiseach as been suggesting as of late.
This is not what the actual data tell us. While the early rise in unemployment was indeed attributable to the construction sector, since October 2008 a rising share of layoffs were coming from white-collar traded and domestic sectors: finance, legal, marketing, advertising and so on. And it is primarily the younger workers who are getting laid off first.
Just as with the ‘demographic dividend’ discussed above, the unemployment figures are influenced by our labour markets policies. According to the latest comparative data, Irish minim wages are the highest in the OECD when measured as a percentage of an average gross wage. Ditto when measured as a percentage of the average after-tax wage. Short of Luxembourg, we have the highest percentage of employees who earn minimum wage.
High minimum wages are generally an impediment to low skills and youth employment. Crucially, high minimum wages are a barrier to jobs creation in professions that require significant on-the-job training and long periods of skills acquisition. Their adverse impact on employment is further exacerbated by the combination of high labour taxes and low capital taxes. The latter effect is simply due to the less understood fact that lower skilled labour is an easier substitute for machinery than skilled workers. Given tax incentives for acquisition of physical capital and simultaneously staggeringly high costs of employing low skilled workers, any employer has strong incentives to reduce lower-skills workforce over time.
This, in turn, means that around 60% of the total new Live Register signatories since November 2007 (the month when the unemployment crisis really started to unfold) are candidates for becoming perpetually unemployed. In a year to April 2009, the number of those on the Live Register for 1 year or more has risen from 49,555 to 70,828 – an increase that can be broken down into a 13.3% rise in April-October 2008 and 26.2% rise in the subsequent 6 months to April 2009. Long-term unemployment is now accelerating, suggesting that by April 2010, long-term unemployment and withdrawals from labour force will affect some 250,000 Irish workers, brining our overall rate of long-term unemployment to over 11% or above that experienced in the dark hour of 1987.
At this point in time, we must face the reality of the labour markets. No amount of spending on FAS or any other up-skilling programmes will make a dent in the gruesome unemployment numbers. Only significant reforms of our labour markets and a reduction in the total cost of employment of younger and less skilled workers will create an environment in which new positions leading to significant on-the-job training can be added to this economy. Chief among these should be lowering our minimum wages, cutting excessively high welfare supports and using the savings generated to reduce employment-distorting taxes on businesses and workers.
Calculations for the Social Welfare Wage Gap:
First, let us start with assumptions on benefits.
Converting the above into the rates of earning, hourly equivalent):
Comparing the above welfare hourly earnings against the latest CSO data on hourly earnings ex-bonuses etc:
Note that above we have welfare hourly equivalent rate of €18.18 per hour exceeding all hourly earnings in lower skilled production workers and manual labour categories for all sub-sectors, except our semi-states dominated Electricity sector. In other words, on per-hourly basis, if you are a lower-skilled worker in the sectors marked with red in the above table, you are better off on welfare than on the job. And this before we adjust for taxes, which we do here:
Just as above, once we factor in the work efforts across different sectors, and net out taxes, we have social welfare recipients coming out better off than lower-skilled employees in all but one broadly defined sectors. Three sectors (marked in blue) are also under threat of being only marginally better off for an average worker (not a low-skilled one, but an average one!).
Lastly, consider recognizing the fact that welfare recipients have virtually unlimited 'vacation' time, while people with jobs have to sweat for their severely restricted R&R allowances. Table below takes this into account by adding the value of 1 month vacation time to the social welfare recipient's benefits...
Bright red now marks new categories of employees who fall below the effective after-tax earnings and benefits of our average welfare recipient.
Lastly, it is worth noting that a person on minimum wage is currently twice worse off working than sitting on a permanent dole.
Good news, Americans are paying less in taxes: Personal current taxes fell $11.1bn in May, compared with a decrease of $61.6bn in April. The Making Work Pay Credit provision of the ARRA of 2009 (allowing a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns) reduced personal current taxes by $49.8bn at an annual rate in both May and April, and $11.2bn in March.
