Don't leave us this way

Economics:Now that the boom is over, Irish people are emigrating once more. Though the reasons for this trend are manifold, there is a lot that could be done by the Government to keep people here, writes MICHAEL CASEY

ONE OF THE most welcome aspects of the Celtic Tiger period was the elimination of emigration, a soul-destroying problem that had bedevilled Irish economic history since Independence. Now, unfortunately, it has returned. Not only must we live with the loss of many of our skilled young people but also with the demoralising side effects on the community.

During the boom there was net immigration of about 50,000 a year. This has now gone into reverse. Net emigration reached 7,800 in the year to April 2009 and this shot to 34,500 in the year to April 2010. In that year the gross figure for emigration was a startling 65,000. The ESRI expects this rate will continue for a long time into the future.

The causes of emigration are fairly complex. The so-called “push” theory is most commonly accepted, and there is no doubt that, at times of economic collapse (for example the Great Famine) people were “pushed” out of the country. It was a matter of survival.

Generally speaking, after the Famine it was difficult to manage the drift from the land. Sons who did not inherit land and lacked education or a vocation for the priesthood had little choice but to go. Theoretically, if wages had fallen, it is possible that some more jobs could have been created at home. But Ireland did not have an industrial revolution and so manufacturing could not absorb the large numbers looking for work. Moreover, they were not part of the elite.

But even in less daunting, more modern times, there was continuing emigration and part of this was probably caused by “pull” factors such as better pay and conditions abroad – and perhaps a desire to see the world. The fact that friends or relatives were already living in the US and the UK made it easier for young Irish people to go there. Such “discretionary” emigration is much more benign than the “push” variety. But it is also quite rare.

It is noteworthy that during the boom years when Ireland had close to full employment, not many chose to emigrate. This suggests “push” factors tend to dominate. Of course wages were relatively high in Ireland during those years so that the attractions offered by foreign countries were not so strong.

Nevertheless, the inadequate provision of jobs at home is clearly a major explanation of emigration. The question then arises as to whether the job deficit is caused by cyclical or structural factors. In other words, is the shortage of jobs due to weak demand or to more deep-seated factors?

In this recession demand is clearly deficient. Consumer spending is still flat because so many people have lost their jobs or suffered pay cuts. Consequently the ability to buy goods and services is greatly curtailed. Government spending is down in real terms, as is investment in plant and equipment. Exports are doing well, partly because of the multinational pharmaceutical sector. It is a buoyant sector but, unfortunately, does not create many jobs.

To make matters worse, fiscal policy is, and will remain, tight. The government will not only reduce its own spending but will also, via tax increases, limit the spending of the private sector. As if that weren’t bad enough, monetary policy is de facto in restrictive mode as well, given that banks are raising interest rates to improve profitability. Higher interest rates restrain overall demand even more.

There can be little doubt that the bulk of unemployment/emigration is caused by deficient demand, and so is cyclical in nature.

Unfortunately, cycles can be of different lengths and, because of the depth of this recession and highly deflationary policies, it is unlikely that demand will recover to a noticeable degree over the next few years.

Recovery may be further delayed by deflationary impulses. If, for example, prices continue to fall, consumers may postpone purchases because they expect prices to fall – as is happening in the housing market.

This is not to deny the existence of some structural difficulties. The many young people laid off in the construction sector, whether they have skills or not, find it relatively easy to emigrate to countries such as Canada, Australia, the US and the UK – where preparations for the Olympic Games have increased demand. If the collapse in construction in Ireland had been less severe there probably would have been less emigration, even if the level of overall demand fell as it did.

Relatively high wages in Ireland might also be regarded as a structural factor since it contributed to a loss of competitiveness. Over a 10-year period, Social Partnership resulted in wage increases over twice those awarded in elsewhere in the EU. Even where low-income earners are concerned, the government seems to believe that in certain sectors (hotels and catering) people priced themselves out of jobs . . . and so they have cut the minimum wage.

Unemployment can occur where the skills of job-seekers do not match those skills needed by potential employers. In Ireland there is no overwhelming evidence of this kind of mismatch. But lack of focus on science subjects, and poor results in maths, might cause problems in the future if we do move towards a smart economy. Wages for people with IT and research skills are also relatively low in Ireland and cause emigration to countries which are further along the smart economy path.

It is hard to avoid the impression that when direct foreign investment slowed in 2007/8, Irish employers were unable to fill the gap. This raises a question about the adequacy of domestic entrepreneurship.

The relatively high rate of unemployment assistance relative to the average wage might also have contributed to unemployment. But job vacancies will still exist.

So this structural issue is not a significant explanation of emigration. Indeed unemployed people will probably not emigrate unless they can command a wage abroad that substantially exceeds their welfare payments at home. The Government is not blind to the fact that a reduction in welfare payments would probably lead to more emigration and ease fiscal difficulties. While government does not want to see a brain drain, they are less likely to be concerned about the emigration of unskilled people.

A free-market economist might well argue that wages should fall so as to “clear” the labour market. In other words, there would be jobs for virtually everyone if wage reductions were substantial. In this sense it could be argued that most job losses and the bulk of emigration are caused by structural factors but this is an extreme theoretical view. Even Keynes believed it would be too much to expect this degree of market flexibility where wages and people’s livelihoods are concerned. It is probably safe to conclude that deficient demand is the usual culprit.

In short, it now seems as if the boom years were an anomaly and that high unemployment and emigration are never far from the surface here, especially when demand is constrained by recession and deflationary policies. Structural factors also play a part – though perhaps not the dominant one.

The concept of “hysteresis” may be relevant. Normally applied to unemployment, it suggests the problem feeds on itself. That is why, in inner cities, if parents are unemployed there is a strong probability that their children will also be unemployed. It is difficult to break the cycle. The same may be true of emigration. Once it begins or resumes, it becomes easier for others to follow. This may be because existing emigrants urge friends and relatives to do the same. If this is true then even if cyclical and structural problems are largely corrected, unemployment and emigration may continue for quite a long time. There is an urgent need to examine in detail the motivations of emigrants. They should not be ignored or disenfranchised as they were in the past.

Solutions to the problems of unemployment and emigration will involve qualitative changes in the way we do business in this country at every level, in both private and public sectors.

Michael Caseyis former chief economist at the Central Bank, member of the executive board of the IMF and author of Ireland's Malaise: The Troubled Personality of the Irish Economy(Liffey Press)