Will Covid make the jobs market more unfair?

Pandemic may accelerate divide between low-paid service jobs and more secure employment

The Irish labour market tends to amplify economic shocks. That’s been observed through several recent recessions.

The reason is that 70 per cent of the workforce – 1.6 million workers – are employed in small- and medium-sized firms (SMEs), many in what are called micro enterprises, those with 10 staff or fewer.

These businesses tend not to have the cashflow or the resources to last long in a downturn, hence we get a swifter and deeper plunge in employment.

Within two months of first official cases of coronavirus being reported here – the prelude to a nationwide lockdown – unemployment shot to a record 28.2 per cent, one of the biggest jumps seen by any country. The equivalent rate in the US in April was 14.4 per cent.

The Republic's jobless rate – based on the Central Statistics Office's (CSO) Labour Force Survey, published this week – was put at 23.1 per cent for the second quarter.

This corresponds to 531,412 people being out of work. By the end of July, it had fallen to 386,935 or 16.7 per cent. And early indications suggest it will decline again in August but at a more modest rate with hard-pressed sectors such as bars, coffee shops, recreation still under a Covid cloud.

Conventional measures of unemployment are too restrictive to capture Covid-19 impact. Under the standard International Labour Organisation criteria, someone is counted as unemployed only if they are both out of work and seeking employment.

But there hasn’t been much point in looking for work while the economy has been in lockdown, so the CSO has come up with a Covid-19 adjusted rate, which includes those on the Government’s pandemic unemployment payment (PUP), who may or may not have jobs to go back to. They are classified as inactive rather than unemployed.


These calculations also don’t include the 370,000 employees on the Government’s temporary wage subsidy scheme (TWSS), which is scheduled to end next March.

The point is we simply don’t know what the true rate of unemployment is and by extension what the true hit from coronavirus is. The hours worked metric, which fell by 22.1 per cent to 59.2 million hours in the second quarter, is probably a better measure of the impact.

“There is huge uncertainty as to precisely where we are as the gap between official and Covid-adjusted employment data for Q2,” KBC Bank chief economist Austin Hughes says.

“We know the economy fell into a deep hole in the spring – that on a range of monthly metrics we have begun to climb out of – but we are still in economic darkness as to how far we are from returning to normal ground,” he says.

“The second and probably more important thing that the jobs data highlight is how wide the variation across sectors, regions and age groups. The pandemic is economically divisive as well as economically disastrous,” he says.

“In the main, those in tech, finance, the public sector and large swathes of industry, particularly those dominated by the multinationals, are seeing a different degree of dislocation,” Hughes says.

“In an important sense, this variation is economically positive as the healthier sectors include ‘higher value’ activities and thereby provide significant support, economy-wide spending power and tax revenues – as the most recent retail sales numbers and tax returns testify.

“However, potentially more corrosive divergences are seen in the evidence from the jobs data and elsewhere of comparatively larger difficulties experienced by younger (and less educated) workers, those working part-time and those in particular regions such as the Border area.

“These sort of variations raise the risk of more permanent economic scarring in specific parts of the economy and argue for more targeted and likely longer lasting support mechanisms from Government in response,” he says.

The big fear after the financial crisis was that we’d be left with a long-term unemployment crisis akin to the late 1980s, which scarred the economic landscape for a decade. However, the opposite happened, a more skilled workforce combined with a supercharged multinational sector returned us to near full employment within eight years. Both those variables are still in place.

The fear, however, is that the pandemic will accelerate a burgeoning divide within the labour force between those in low-paid, low-skilled service jobs and those in more secure employment.

The lockdown already exposed a deep divide between the can and can-nots – those who can work at home or online and those who cannot.

The CSO data show the accommodation and food services suffered the greatest decrease in employment (-29.6 per cent, or -53,600 people) in the second quarter, followed by administration and support (-17.2 per cent, or -18,800 people) and construction (-12.1 per cent, or -17,800 people).

Central banks across the globe have flooded the financial system with money since the 2008 financial crisis in a bid to restore flagging growth, inflating asset prices in the process. And that seems set to continue. It is fuelling a stock market rally that seems wholly out of keeping with the current economic outlook.

It also fuelling, in combination with other trends such as automation and digitalisation, a wage divide that seems to be at the heart of a more fractured, divisive politics.

On the wider economic outlook, the minutes of the European Central Bank’s latest monthly meeting are instructive.

Economic activity

On the upside, it notes that households could “unwind the forced savings accumulated during the lockdown period, leading to some ‘catch-up effects’ in consumption”. Consumption is the prime driver of economic activity, accounting for two-thirds domestic demand in the Republic and we’ve already seen a boost in consumer spending in June. The question is whether this is the beginning of positive trend or a short-lived splurge, the product of two months of pent-up demand, that will give way to a more cautious, coronavirus-scarred consumer environment.

On the downside, the minutes make reference to possible “cliff effects” occurring when various policy support measures expire, especially with respect to the labour market. “This could lead to increases in outright unemployment instead of the decreases in hours worked per person seen thus far,” it says. The difference is crucial as it refers back to whether a person is unemployed or temporarily inactive.

The other big unknown is the level of business insolvencies we’re likely to see amid reports that much of liquidity supports provided by Government but metered through a cautious banking system aren’t making it to the businesses that need them.

In its latest analysis, the Central Bank speculates that Covid-19 may fast-track some of the expected business failures under Brexit.

The bank’s “baseline” hypothesis involves a gradual reopening of the State this year and a rebound in economic activity – the one we hope we’re on – and sees the Irish economy contracting by 9 per cent this year, but expanding by 5.7 per cent in 2021.

The more “severe” model would mean the economy contracting by nearly 14 per cent in 2020 with unemployment staying elevated for several years after that and that doesn’t include the possibility of a messy Brexit.

Goodbody chief economist Dermot O’Leary says the outlook for the Irish economy is inextricably linked to the measures that the Government implements in response to the virus.

"Those countries that have introduced more stringent restrictions on economic and social activity have had a worse economic outcome. Ireland is far from an outlier in terms of the incidence of the virus yet has consistently had among the more stringent regimes in the world," he says.

The point is illustrated by the construction sector here. The downturn in output in the second quarter is expected to be in region of 30 per cent, compared to a contraction of just 4 per cent in Germany, a disparity that reflects the Republic's tighter restrictions.

“To its credit, the Government has implemented one of the largest direct fiscal responses in the EU, but the ongoing low levels of activity in some sectors – leisure and travel in particular – presents a clear and present danger for these industries,” O’Leary says.

“While one can question whether widescale lockdowns were appropriate at the start of the pandemic, little was known at the time. With more known about how the virus impacts different cohorts, Ireland should not continue to be an outlier in its responses,” he says.

“ With Government debt spiralling, unemployment well in double-digit territory and many businesses vulnerable, a greater focus must be on the health of the economy, while also addressing the health concerns in a more targeted way,” O’Leary adds.

The Government’s wage support schemes have ensured that whatever happens, income – a key driver of future consumption – will not as badly impacted as activity. And that’s probably the single biggest positive in an extremely uncertain equation.

This, of course, is being facilitated by Government borrowing on a grand scale and a budget deficit of probably €30 billion this year.

Spending cuts

"It might be the first time in nearly five decades that we have had such a fiscal response to an economic shock," says University College Cork lecturer and ex-head of the Irish Fiscal Advisory Council Seamus Coffey.

“In Ireland, we have repeatedly seen poor fiscal management in the good times make downturns worse as tax increase and spending cuts were introduced when the economy was in need of the opposite,” he says.

“This time we are seeing spending increases in response to the economic hit and it should not be taken for granted,” Coffey says.

“Part of the reason we can do this is because this is a global crisis. All countries are suffering because of the crisis. Previous Irish downturns would not have been worldwide (early 1980s) or Ireland would have had a much more severe downturn (late 2000s),” he says.

“On this occasion the levels of monetary and fiscal policy was pulling in the same direction everywhere. This has meant that the deficit Ireland will run will not stand out and is being facilitated by several factors such as loose monetary policy and the suspension of fiscal rules,” he says.

“If the economic hit we are experiencing was limited to Ireland, it is unlikely that the fiscal response would have been as large as it has been,” Coffey says.

Recent bond auctions by the National Treasury Management Agency have been heavily oversubscribed, reflecting the sovereign's strong financial standing.

Coffey points to recent Revenue figures on employee gross pay, which show the total for the three-month period between March and May was €22.5 billion, a drop of €2.7 billion, or 11 per cent, on last year.

If repeated for a year, that would correspond to an income loss of over €10 billion which is comparable to what we saw in the last crash.

But if we take account of the TWSS (€1.3 billion) and PUP (€1.9 billion) it can be seen that a comparative income figure for 2020 is €25.7 billion. This is actually up €0.5 billion, or 2 per cent, on 2019, Coffey notes.

“So, yes, there has been a significant hit to economic activity but a large part of the income effect of this has been offset by Government borrowing. This can’t continue indefinitely but on the assumption that the duration of the crisis is temporary it can be maintained in the short run,” he says, while noting that over the long term the increased debt will need to be serviced.

The economic hit we’ve suffered is only beginning to emerge and the outlook is being driven by epidemiology rather than economics, which makes forecasting next to impossible.