Post-Tiger labour market remains buoyant

Economics: According to the latest Quarterly National Household Survey (QNHS), published by the Central Statistics Office (CSO) this month, overall employment in the economy rose by a very respectable 3 per cent last year.

This represented an improvement on the sub-2 per cent growth rates in 2002 and 2003, and means that the increase in employment to date in what may be termed the "post-Tiger economy" has averaged about 2.5 per cent per annum. While this is not much more than half the rate achieved in the halcyon years of 1993-2000, it is a pretty impressive performance nonetheless and the envy of most countries in Europe and beyond.

At least as remarkable is what has been happening to the labour force.

Here, there is very little evidence of a post-Tiger slowdown. Between 1993 and 2000, the labour force grew at an annual average rate of 2.7 per cent; since 2000, its rate of increase has been not noticeably less, at 2.5 per cent per annum. This is slightly faster than what was projected by the Economic and Social Research Institute (ESRI) in its last Medium-Term Review.

Assuming growth in output per person at work of around 3 per cent, it suggests that the economy's potential growth rate is around 5.5 per cent per annum. Again, this is very high by international standards. Of course, it comes with the standard warning: potential growth is no guarantee of actual growth.

Why is the labour force still growing at such a robust rate and how long can this continue? To answer these questions, recall that there are three components of labour force growth: the natural increase, rising participation rates and net immigration.

The natural increase is the increase that occurs because of the age structure of the population. A crude measure of the potential for natural increase is provided by comparing the number of 20-24 year olds (labour force entrants) in the population with the number of 60-64 year olds (labour force retirees). In the Republic, the former continue to outnumber the latter by a wide margin. In 2004, there were an estimated 339,000 20-24 year olds, but only 166,000 60-64 year olds.

As time goes on, however, the margin of difference will narrow and the natural rate of increase will decelerate. To get a sense of this, compare the number of 15-19 year olds (an estimated 301,000 in 2004) with the number of 55-59 year olds (215,000).

As far as participation rates are concerned, a leitmotif of the 1990s was the big increase in female rates. Between 1993 and 2000, female participation rose from 38 to 47 per cent, spearheaded by quite dramatic changes amongst the middle-age cohorts. For women in the 35-44 age bracket, the participation rate rose from 48 to 63 per cent; for 45-54 year olds, it rose from 37 to 52 per cent.

Since 2000, female participation rates have continued to rise, if somewhat less quickly. The overall rate has moved up to almost 50 per cent, while the rates for 35-44 year olds and 45-54 year olds have risen to 66 and 60 per cent respectively.

There is evidence to suggest that, for most age groups, the female participation rate has peaked and that, for the others, a peak may not be far off. Accordingly, this source of labour force growth seems set to taper off in the next few years.

The importance of immigration as a source of labour supply has increased since 2000. From 1993 to 2000, net inward migration averaged just over 10,000 per annum; since 2000, the average has been 34,000 per annum.

This has been the outcome of two trends: a reduction in the number of emigrants and an increase in immigrants. Whatever the underlying trends, the rate of net immigration over the past couple of years has probably boosted labour force growth by 0.7-0.8 per cent per annum.

Given increasing problems of congestion and accommodation costs, it would be surprising if this remained the case. Having said that, net immigration has been unexpectedly strong in the past couple of years. The ESRI's review allowed for net immigration of just 20,000 over the 2003/2004 period. However, it seems that the number reached 70,000.

As mentioned already, overall employment in the economy grew by 3 per cent in 2004 on average. By the end of the year, the pace of growth was somewhat faster at 3.5 per cent, pointing to a gentle build-up of momentum during the year. Encouragingly, the private sector outpaced the public sector with employment growing by almost 5 per cent in the former and 2.8 per cent in the latter. Also, there appears to have been a more pronounced build-up of momentum in the private sector during the year.

Disaggregating the data further reveals quite sharply contrasting fortunes across sectors. Employment in areas such as hotels and restaurants and transport and communications remains broadly unchanged. Employment in what the QNHS calls "other production industries" was up by a little more than 1 per cent on the year although, separately, the CSO estimates that employment in industry, which must account for the bulk of this sector, fell by almost 3 per cent. Financial and business services are growing strongly with numbers up by 7 per cent on the year. But the star performer remains construction, which accounted for 40 per cent of the economy-wide employment increase in 2004, where the number at work at the end of the year was more than 13 per cent above the year earlier level, and where more than one in eight of all people working in the economy are now engaged.

This draws attention once again to how much the current pace of economic activity owes to the exceptionally buoyant conditions in the construction sector. Other data draw attention to how muted a role the exporting sectors of the economy are playing. Whether and for how long this conjunction can be sustained are questions I'll return to in a future column.

Jim O'Leary currently lectures in Economics at NUI-Maynooth. He can be contacted at jim.oleary@nuim.ie