Unedited version of my Sunday Times article from July 22.
These
days, with nearly 15 percent unemployment, and almost 530,000 currently in
receipt of some unemployment supports, the minds of Irish policymakers and
analysts are rightly preoccupied with jobs creation. Every euro of new
investment is paraded through the media as the evidence of regained confidence in
the economy. This week, even the insolvent Irish Government got into the game
of ‘creating jobs’ with an ‘investment stimulus’.
Alas,
economics of jobs creation is an entirely different discipline from the
political PR accompanying it. In the real world, some private and public jobs
are created on the basis of sustainable long-term demand for skills. Others are
generated on the foot of tax advantages and subsidies, including stimulus. In
the short run, the latter types of jobs can still yield a positive boost to
economic activity. But in the longer run, they are not sustainable and drain
resources that can be better allocated to other areas. The ultimate difference
between the two types is found in productivity growth associated, or the
competitiveness gain or loss generated in the economy.
The
prospects of Irish economic recovery have been rhetorically coupled with the
improvements in our cost competitiveness since early 2008. And for a good reason.
Rapid deterioration in competitiveness in years before the crisis is what got
us into the situation where structural collapse of the economy was inevitable.
During
the Celtic Garfield era of 2001-2007, Irish Harmonized Competitiveness
Indicators (HCIs) have deteriorated by some 26%. Our productivity growth,
stripping out effects of MNCs transfer pricing and tax arbitrage, has been
running well below the rate of the advanced economies average. In years of the
property bubble, Ireland was the least competitive economy in the entire euro
area.
Structurally,
our lack of competitiveness was underpinned by the labour costs inflation in
relation to producer and consumer prices. Consumer costs-related
competitiveness indicator for Ireland deteriorated by 38 percent between the
end of 2001 and mid-2008, more than one-and-a-half times the rate of
deterioration in producer costs-linked measure. Another, even more pervasive
and long-term force at play was creation of hundreds of thousands of jobs in
the sectors, like building and construction, domestic retail and finance that lagged
in value-added well behind the exporting sectors.
This
was not a model of sustainable jobs creation. Instead of incentivising
investment in real skills and aptitude to work and entrepreneurship, we taught
our younger generation to expect a €40-45,000 starting gig in a ‘professional’
occupation or laying bricks at a construction site. Not surprisingly, uptake of
degrees in harder sciences and more mathematically intensive fields of business
studies slumped, while degrees in ‘softer’ social and cultural studies were
booming. The workforce we were producing had a rapidly expanding mismatch
between pay expectations, career prospects, and reality of an internationally
competitive economy.
Placated
by the opportunity to locate in the corporate tax haven, our MNCs were drumming
up the myth of the superior workforce with great skills and education. The
Government and its quasi-official mouthpieces of economic analysis in academia,
banks, and financial and professional services were only happy to repeat the
same line.
The
crisis laid bare the truths about our fabled competitiveness outside the
corporate tax arbitrage opportunities.
Since
then, the focus of the Government labour market reforms, in rhetoric, if not in
real terms, has been on regaining cost competitiveness. Sadly, this process so
far replicates, rather than corrects the very same errors of judgement we
pursued before the crisis erupted.
In
terms of headline metrics, things are looking up. Our harmonised
competitiveness indicator (HCI) has improved by 5% between January 2009 and
April 2012 – the latest data available. However, these gains are accounted for
by two drivers. Firstly, jobs destruction in the construction and retail
sectors has led to rapid elimination of less productive – from economic
value-added point of view – activities. Secondly, domestic business activity
collapse added price deflation to the equation, distorting gains from any real
productivity improvements. Thus, our HCI deflated by producer prices has fallen
7.7% over the above period of time, while consumer prices-deflated HCI dropped
12.5%.
Thus,
much still remains to be done on the competitiveness front, especially since
deflationary pressures in the economy are no longer rampant. The momentum of
gains in competitiveness experienced in 2008-2010 has slowed dramatically and
is likely to continue declining.
On
the one hand, jobs destruction has moderated markedly, while across the economy
overall earnings are rising. Wages inflation in several sectors where skills
shortages are present, such as ICT and internationally traded services, now
complements declining competitiveness of individual tax policies.
Year
on year, Q1 2012 saw average weekly earnings rising in Ireland by 0.7%. Weekly
earnings in the private sector went up 1.5% annually, while there was an
increase of 2.0% in the public sector over the year. Between Q1 2008 and Q1
2012, average weekly earnings fell 3.5% in the private sector and rose 0.8% in
the public sector.
The
skills crunch is evident both via the earnings inflation within the larger size
enterprises and by occupational categories. earnings of Managers, professional
and associated professionals rose 5.7% y/y in Q1 2012 and are now 1.1% ahead of
where they were in Q1 2009. Earnings for clerical, sales and service employees
are up 2.4% y/y and down almost 2% on 2009.
The
real problem with our labour costs competitiveness is that with rising tax
burdens it is becoming increasingly difficult to import skills and our system
of training and education simply cannot deliver on the growing demand for
specialist knowledge. The former problem has been repeatedly highlighted by the
indigenous exporters. The latter has been a major talking point for the larger
MNCs. The latest example of this is PayPal, whose global operations vice-president Louise Phelan warned this week
that Ireland needs to focus on language skills, especially in German, Dutch and
Nordic languages “to protect our status as a European gateway”.
Sadly,
the Government is listening to the latter more than to the indigenous
entrepreneurs.
Reforming
education system is a long-term process and should not be tailored to the
current demand for narrow skills. Instead, it should aim to provide broad and
diversified education base, including leading (not obscure) modern languages,
proper teaching of core subjects, such as history, philosophy, arts and
sciences.
Such
reforms will not have a direct impact on the likes of PayPal’s ability to hire
people with very narrow skill sets. Which means that Ireland will have to systemically
reduce the costs of importing human capital.
To derive real competitive advantage
anchored in sustainable jobs creation and productivity growth, we need to focus
on creating the right mix of tax incentives, educational supports and
immigration regulations to lower the cost of employing highly skilled workers
and increase returns to individual investments in education and training. Let us then leave the job of selecting which areas of study
should be pursued to those who intend to succeed in the market place.
Box-out
The CMA Global Sovereign Credit Risk Report
for the second quarter 2012 shows Ireland improving its ranking position from
the 7th highest risk sovereign debt issuer in the world in Q1 2012
to the 8th – a gain that is, on the surface, should signal that the
country Credit Default Spreads (CDS) were improving compared to its peers.
While Ireland’s CDS have indeed improved during the quarter falling below 600
basis points (bps) in the last two days of June for the first time since the
first week of May, in effect Ireland ended Q2 2012 pretty much where it started
it in terms of CDS levels. What really propelled Irish rankings gain was the
return of Greece to the CDS markets few weeks after the country ‘selective
default’. In fact, Ireland’s rate of improvement (by 1 notch) is identical to
that of Cyprus and marks below average performance for the group of the highest
risk sovereigns. Perhaps even more revealing is the comparative between Ireland
and Iceland. The latter is ranked 20th in the risk league table,
improving in Q2 2012 by two ranks. At the end of June, Icelandic 5 year CDS
were trading at 290 bps, with implied cumulative probability of country default
over the 5 years horizon of 22.9%. Ireland’s CDS were trading at 554 bps with
implied cumulative probability of default of 38.6%.
