ECONOMICS:We need policies aimed at reducing the rise in redundancies and targeting those who have lost their jobs, writes JIM O'LEARY
QUITE THE most alarming aspect of this week’s ESRI quarterly was the forecast that the unemployment rate would reach 16.8 per cent next year. This is the most bearish assessment of the implications of the current recession for the labour market published by anyone to date. It implies a near-fourfold increase in the rate of unemployment in just three years (it was 4.5 per cent in 2007), and an incidence comparable to the worst experience of the 1980s (the rate peaked at 17.6 per cent in 1987).
Expressed in absolute terms, the figures convey perhaps a clearer sense of the unfolding catastrophe. The number of people out of work is expected to average 366,000 next year compared with 100,000 in 2007. What this might imply for the numbers on the dole queues is not spelled out, but my guess is that it would be consistent with a Live Register count of somewhere between 500,000 and 550,000. Given an average cost of €20,000 per person, this in turn would convert into a bill of €10-€11 billion for the exchequer, an enormous drain on public resources, equivalent to almost a third of the likely tax take.
The speed with which unemployment has spiralled upwards over the past 12-18 months has been frightening. Indeed, the rate of increase has been strikingly rapid even allowing for the contraction of output that has taken place. Between the first half of last year and the corresponding period of this year, it now looks like the unemployment rate will have jumped by five to six percentage points. The historical relationship between unemployment and output would suggest that an increase of this magnitude has coincided with a 15-18 per cent fall in GDP. Unless all the pundits are ridiculously wide of the mark, the decline in GDP over the period concerned will be nothing like as steep as this.
So, it would appear that in the current downturn, the sensitivity of unemployment to output is uncommonly high. I can think of two reasons for this. The first is that output losses in the downswing to date have been concentrated in more labour-intensive sectors such as construction and retailing to a greater extent than in the past. And the second is that there are not as many attractive emigration options this time around for those who lose their jobs.
The sensitivity of unemployment to output may diminish somewhat in the period ahead as the weakness of economic activity becomes less concentrated, but the ESRI’s forecasts still suggest that for the recession as a whole it will be higher than it has been in the past: even in the face of the cumulative 12 per cent decline in GDP between 2008 and 2010 being forecast by the ESRI, the 12 percentage-point rise in the unemployment rate that it is projecting over the same period is extraordinarily large.
Of course, while short-term economic forecasting is more than usually hazardous at the moment, forecasting Irish labour market developments is an even more treacherous exercise. One of the reasons for this is that there is virtually no body of evidence upon which to base an assessment of the likely behaviour of Ireland’s immigrants in a recession, large-scale immigration being such a recent phenomenon. What the ESRI assumes here is a steep fall in inward migration to 20,000 a year in 2009 and 2010 (down from 100,000-plus in 2007), which seems entirely reasonable. On the other hand, their assumption that gross outward migration will remain little changed from the rates registered in 2007-2008 implies the expectation that very few of the existing stock of immigrants will leave in the next two years. This is more questionable. Whether it proves to be correct or not will largely depend on the timing and strength of the global recovery. The sooner that recovery gets under way and the stronger it is, the sooner are we likely to see an appreciable exodus. When that happens, the Irish unemployment rate may fall quite sharply.
As I wrote in an earlier article this week, quibbling with the finer detail of a forecast of economic disaster is a matter of low importance by comparison with addressing the policy challenge such a disaster presents. Whether the course we are embarked upon produces an unemployment rate of somewhat more or somewhat less than 16.8 per cent, the result will be widespread misery and waste of human resources. A twin-track response is called for.
First, we need to identify and adopt changes in policy and in attitude that can reduce the rise in unemployment. Where faced with the imperative of cutting payroll costs, firms need to explore fully all other options before pressing the redundancy button, and employees need to engage positively in the consideration of alternatives to redundancy. In addition to plain vanilla pay cuts, these alternatives may include reduced hours of work, unpaid leave and career breaks. Of course, for some workers, redundancy may be more financially attractive than the retention of a job with reduced earnings. Because of the interplay of the tax and social welfare systems, replacement ratios (the ratio of household disposable income when unemployed to when at work) are very high in some circumstances, and will increase further if taxes, especially taxes on the low-paid, are raised again. Clearly, there are implications here for policies in relation to tax and social welfare.
The second track consists of policies targeted at those who lose their jobs, including interventions designed to equip them with the skills to become re-employed as quickly as possible when recovery begins. There was much useful discussion of this and related issues at yesterday’s ESRI conference on the labour market and recession, the proceedings of which can be downloaded from the ESRI website.
jim.oleary@nuim.ie
