Another recent article in the
Sunday Times:
December Live Register figures show that this column’s earlier prediction of further deterioration in the employment and labour force conditions in Ireland for Q4 2009 – Q1 2010 are, unfortunately, coming true.
The Live Register now stands at 426,700 or 1,200 above the previous record set in September. Unemployment is estimated at 12.5 percent, and rising. Declining labour force participation and net emigration are now the only two factors that keep the unemployment rate from touching 14 percent today.
But the latest data shows that the situation on the jobs front is still worsening. Between December and November, Ireland’s ranks of unemployed swelled by 4,200, more than cancelling out the reduction in numbers achieved in October. Since March 2007 Live Register counts have fallen only once, despite the fact that we are now drawing record numbers of young would-be-workers back into colleges and training programmes.
The trend suggests that by the end of this year, we are likely to reach 13.5 percent official unemployment or higher. While the ESRI and many independent economists have highlighted the possibility that elevated levels of joblessness will persist for some time, few are willing to face the reality that the current trends and previous crises experiences across Europe, suggest that Irish long-term unemployment can remain at more than five times the rate prevailing during the Celtic Tiger era through 2020.
Broad as they are, the Live Register figures hide a much more unpleasant arithmetic that relates to the issues of growing long term unemployment, declining labour force, and the inadequacy of our policy responses to the crisis.
December Live Register shows that the majority of the seasonally adjusted increases in unemployment occurred in over 25 years of age group of workers – suggesting that the jobs losses are continuing to accumulate in core employment sectors.
More detailed QNHS results for Q3 2009 show that industry and manufacturing are now leading other sectors in terms of jobs losses. This week’s data for Q4 2009 industrial production confirms the bleak prognosis for jobs in these sectors. Computer, electronic and optical products and the overall modern manufacturing sectors are now deteriorating at the rates where employment levels in these high value-added activities are likely to come under threat in months ahead.
With more skilled and better educated workers joining the dole queues, the prospects of finding future employment for the previous Live Register signees are getting worse by the week. Many of these workers are now on the Register for 10 months or longer. In fact, from the beginning of the crisis through March 2009, some 196,000 people signed up for unemployment. Majority of these people have by now exhausted their redundancy payments and are facing transition to social welfare. They are Ireland’s new army of the long-term unemployed.
Long-term or structural unemployment is much more severe than that driven by a recession. Long term joblessness almost invariably leads to a loss of skills and lower marketability. It also results in a significant decline in incentives to seek employment or invest in future skills. Even in publicly-financed training programmes, internationally, the length of unemployment spell is negatively related to the training programmes outcomes.
Just how sticky the problem of long term unemployment is can be illustrated by the fact that during the Celtic Tiger era, as hundreds of thousands of foreign workers moved to Ireland, our long term unemployment remained static.
And Ireland is not unique in this experience. In the US, long term unemployment remained unchanged from the 1980s through mid-1990 s until the Clinton Administration reforms of the social welfare system. Across the Euro area, during the growth years of the last decade, significant declines in short term unemployment were accompanied by high long term joblessness.
Per latest data, in a year to October 1, 2009 for every five persons joining the Live two have moved into long-term unemployment, while more than one dropped out of the labour force. Thus, since the start of the crisis in Q4 2007, more than 140,000 people have either joined the ranks of the structurally unemployed or stopped searching for a job.
For these workers, there are virtually no existent policy platforms addressing the issues of skills and job search incentives.
Only holistic reform of the social welfare (aimed at reducing incentives to stay outside the workforce), a substantial cut in the minimum wage, plus a robust businesses-led jobs creation can return this pool of potential talent back to productive economy. A cut in an excise duty on booze, a car scrappage scheme and a microscopic drop in Vat comprising Government’s latest package of fiscal supports for a recovery simply won’t do.
Instead of businesses-oriented programmes aimed at stimulating exporting and domestic investment, our jobs creation policies are now shifting jobless off the official register into the twilight zone of hidden unemployment. CSO data quantifies two programmes, set up in 2009, through which taxpayers pay the unemployed to undertake Fas-supervised ‘jobs’. These individuals are not included on official unemployment roster. The Short-Term Enterprise Allowance (STEA) scheme pays workers to engage in self-employment. The Work Placement Programme engages welfare recipients in unspecified subsidized ‘employment’. In total, 3,785 individuals were ‘employed’ under both programmes at the end of September 2009.
One must question the ability of these workers to sustain employment without state subsidies at any time in the foreseeable future.
Absolutely nothing is known about the longer-term success of Fas-assisted programmes in general. Meanwhile, in countries where ‘involuntary entrepreneurship’ activities, such as STEA, are widespread, these programmes are often blamed for driving workers to accept sub-optimal jobs path in exchange for immediate income. In other words, involuntary entrepreneurship prevents many workers from actively seeking better jobs and/or investing in new skills.
A key to success of the work placement programmes rests with three broader principles, none of which appear to have been addressed by the policies put in place since the inception of the crisis.
First, selection mechanisms that determine who gets to participate in the programme must ensure that both the workers and the self employed are fully equipped for the challenges of the programmes. In the case of Fas-supported social welfare recipients programmes, the issue is whether the programmes actually select the best suited recipients with prior experience in the workforce.
Second, choice of businesses attracted into such programmes must be based on their ability to provide broadly marketable skills. Often, placement programmes box participants into jobs with firm-specific skills. Such programmes are only successful if they involve large and well-anchored employers. Even then, a restructuring or scaling down of Irish operations can leave these programmes participants with no transferable skills.
Third, the incentives to retain these participants in the labour force after the funding runs out must be put in place before the programmes commence. Clearly, absent a comprehensive reform of our social welfare system and minimum wage laws, this critical aspect of the programmes has not been followed through.
December Live Register figures show that this column’s earlier prediction of further deterioration in the employment and labour force conditions in Ireland for Q4 2009 – Q1 2010 are, unfortunately, coming true.
The Live Register now stands at 426,700 or 1,200 above the previous record set in September. Unemployment is estimated at 12.5 percent, and rising. Declining labour force participation and net emigration are now the only two factors that keep the unemployment rate from touching 14 percent today.
But the latest data shows that the situation on the jobs front is still worsening. Between December and November, Ireland’s ranks of unemployed swelled by 4,200, more than cancelling out the reduction in numbers achieved in October. Since March 2007 Live Register counts have fallen only once, despite the fact that we are now drawing record numbers of young would-be-workers back into colleges and training programmes.
The trend suggests that by the end of this year, we are likely to reach 13.5 percent official unemployment or higher. While the ESRI and many independent economists have highlighted the possibility that elevated levels of joblessness will persist for some time, few are willing to face the reality that the current trends and previous crises experiences across Europe, suggest that Irish long-term unemployment can remain at more than five times the rate prevailing during the Celtic Tiger era through 2020.
Broad as they are, the Live Register figures hide a much more unpleasant arithmetic that relates to the issues of growing long term unemployment, declining labour force, and the inadequacy of our policy responses to the crisis.
December Live Register shows that the majority of the seasonally adjusted increases in unemployment occurred in over 25 years of age group of workers – suggesting that the jobs losses are continuing to accumulate in core employment sectors.
More detailed QNHS results for Q3 2009 show that industry and manufacturing are now leading other sectors in terms of jobs losses. This week’s data for Q4 2009 industrial production confirms the bleak prognosis for jobs in these sectors. Computer, electronic and optical products and the overall modern manufacturing sectors are now deteriorating at the rates where employment levels in these high value-added activities are likely to come under threat in months ahead.
With more skilled and better educated workers joining the dole queues, the prospects of finding future employment for the previous Live Register signees are getting worse by the week. Many of these workers are now on the Register for 10 months or longer. In fact, from the beginning of the crisis through March 2009, some 196,000 people signed up for unemployment. Majority of these people have by now exhausted their redundancy payments and are facing transition to social welfare. They are Ireland’s new army of the long-term unemployed.
Long-term or structural unemployment is much more severe than that driven by a recession. Long term joblessness almost invariably leads to a loss of skills and lower marketability. It also results in a significant decline in incentives to seek employment or invest in future skills. Even in publicly-financed training programmes, internationally, the length of unemployment spell is negatively related to the training programmes outcomes.
Just how sticky the problem of long term unemployment is can be illustrated by the fact that during the Celtic Tiger era, as hundreds of thousands of foreign workers moved to Ireland, our long term unemployment remained static.
And Ireland is not unique in this experience. In the US, long term unemployment remained unchanged from the 1980s through mid-1990 s until the Clinton Administration reforms of the social welfare system. Across the Euro area, during the growth years of the last decade, significant declines in short term unemployment were accompanied by high long term joblessness.
Per latest data, in a year to October 1, 2009 for every five persons joining the Live two have moved into long-term unemployment, while more than one dropped out of the labour force. Thus, since the start of the crisis in Q4 2007, more than 140,000 people have either joined the ranks of the structurally unemployed or stopped searching for a job.
For these workers, there are virtually no existent policy platforms addressing the issues of skills and job search incentives.
Only holistic reform of the social welfare (aimed at reducing incentives to stay outside the workforce), a substantial cut in the minimum wage, plus a robust businesses-led jobs creation can return this pool of potential talent back to productive economy. A cut in an excise duty on booze, a car scrappage scheme and a microscopic drop in Vat comprising Government’s latest package of fiscal supports for a recovery simply won’t do.
Instead of businesses-oriented programmes aimed at stimulating exporting and domestic investment, our jobs creation policies are now shifting jobless off the official register into the twilight zone of hidden unemployment. CSO data quantifies two programmes, set up in 2009, through which taxpayers pay the unemployed to undertake Fas-supervised ‘jobs’. These individuals are not included on official unemployment roster. The Short-Term Enterprise Allowance (STEA) scheme pays workers to engage in self-employment. The Work Placement Programme engages welfare recipients in unspecified subsidized ‘employment’. In total, 3,785 individuals were ‘employed’ under both programmes at the end of September 2009.
One must question the ability of these workers to sustain employment without state subsidies at any time in the foreseeable future.
Absolutely nothing is known about the longer-term success of Fas-assisted programmes in general. Meanwhile, in countries where ‘involuntary entrepreneurship’ activities, such as STEA, are widespread, these programmes are often blamed for driving workers to accept sub-optimal jobs path in exchange for immediate income. In other words, involuntary entrepreneurship prevents many workers from actively seeking better jobs and/or investing in new skills.
A key to success of the work placement programmes rests with three broader principles, none of which appear to have been addressed by the policies put in place since the inception of the crisis.
First, selection mechanisms that determine who gets to participate in the programme must ensure that both the workers and the self employed are fully equipped for the challenges of the programmes. In the case of Fas-supported social welfare recipients programmes, the issue is whether the programmes actually select the best suited recipients with prior experience in the workforce.
Second, choice of businesses attracted into such programmes must be based on their ability to provide broadly marketable skills. Often, placement programmes box participants into jobs with firm-specific skills. Such programmes are only successful if they involve large and well-anchored employers. Even then, a restructuring or scaling down of Irish operations can leave these programmes participants with no transferable skills.
Third, the incentives to retain these participants in the labour force after the funding runs out must be put in place before the programmes commence. Clearly, absent a comprehensive reform of our social welfare system and minimum wage laws, this critical aspect of the programmes has not been followed through.
At this stage, there is no evidence that either Fas or any other body responsible for Ireland’s jobs support programmes have a comprehensive system of policy formulation and controls to assure that those participants who complete the programmes will not be once again drawn into the welfare system.
Box-out:
As was noted in this column last week, the stellar performance of Irish exports in 2009 was driven largely by the booming pharmaceutical sector, which posted a 12 percent increase in overseas sales in 12 months to December. However, the future of this sector is shrouded in uncertainty. Take the following major threats looming on the horizon. In Cork, Pfizer-Wyeth manufactures its blockbuster drug, Lipitor (with sales of US$12 billion in 2005 and rising since) for shipments to Europe, Middle East and Africa. Comes November 2011, Lipitor will face steep competition from generic manufacturers. The effect of Lipitor coming off patent protection is hard to estimate, but given Pfizer’s merger with Wyeth – some rationalisation globally will have to take place to justify high valuations of the combined firm. Out-of-a-blockbuster Irish operations might just be a convenient target. Roche-Genentech and Merck-Schering-Plough marriages are also facing some tough decisions on what to do with their existent older plants.
Of course, big pharma is not the only sector under pressure. Intel’s Leixlip plant last time saw investment in 2005-2006 under Fab 24.2 programme. Given life expectancies for semiconductor lines, the Leixlip facility is up for a new round of funding in the next couple of years. Or is it? To-date, IDA and Ireland-based MNCs were able to sustain high levels of inward investment to support renewal of the plants and product lines. However, as Dell’s experience shows, it takes only months for a US$15 billion manufacturer to pick up and move out of the state. It will take years to find a replacement.
Maximal (for the period GDP per capita, PPP-adjusted) with 2 standard-deviation 'candles' around it. Notice two broadly defined groups of countries: Overperformers (including Ireland) and Underperformers. Now, I know - I shouldn't be using GDP here, but I am not about to make a statement about the actual 'wealth' or 'riches' of Ireland, so GDP will do.
It looks like GDP per capita in the end is much more responsive to increases in broadband penetration than to the starting position. In other words, economies with low legacy stock of communications seem to be catching up through broadband penetration improvements. Is this suggesting that a country can leapfrog weak communications sector legacy by jumping straight into broadband age? Well, sort of. The problem here is that we do not separate out the twin effects of growth in broadband penetration (much higher for countries doing leapfrogging) and simultaneous growth in voice telephony penetration (also likely to be much higher for countries doing leapfrogging).
Let us take physical capital as a share of GDP and compare its effects on overall GDP per capita, against the same effect being induced by education. What is unambiguous is that countries with higher physical capital base share of GDP tend to have lower GDP per capita. How come? Because they are physical capital-intensive, i.e their production is stuck in the late industrial age. Countries with higher education are more labour-intensive and especially skilled-labour intensive, and thus have higher GDP per capita.
Ouch. We are an outlier precisely in the direction suggested by the gap identified above. Note that moving to a 'Sweet Spot' of highly productive economies with significant rates of utilization of human capital requires both - more physical capital formation and even more education. Also note just how inefficient is the stock of education in the upper 'bubble' group of countries that includes all Nordics, Japan and France. These countries are simply not being able to derive the same returns to education in terms of GDP per capita as the 'Sweet Spot' nations.
And there is an even weaker, and negative, relationship between education and physical capital. This negative coefficient of correlation does suggest, though, that we are in the early stages of the process whereby physical capital takes second seat to human capital in characterising modern economy. If so - good news for 'Knowledge' economists out there - machines do not possess knowledge. People do. But it is also bad news to all social engineers out there who still think technocratic management of economy/society is possible. Knowledge requires heterogeneity and creativity. And these are antitheses of planning and policy-driven controls and incentives.
This, of course, can be interpreted as a warning to the folks interested in restricting the freedom of people to communicate. If China, and other countries that impose controls on internet, want to have a 'Knowledge'-intensive, modern economy, they will have to deliver real (i.e. free of political ideologies and biases) education and meaningful (i.e. free of political 'bottlenecks') knowledge infrastructure (in this case, broadband).
