Priority is to get people back to work
ANALYSIS:THE JOB opportunities that exist, and the related level of joblessness that pertains at a given time is arguably the most important policy issue in economics.
As such, it is fair to conclude that the most serious economic policy failure of the last 40 years in Ireland was the inability to increase employment in the 1980s and early 1990s, despite the huge increase in the potential labour force in that period.
The result of this failure was a dramatic increase in unemployment and the loss of almost 200,000 people to emigration. The sustained failure to increase employment meant not only that the high level of joblessness persisted into the mid-1990s, but also that an increasing proportion of that total drifted into long-term unemployment (and, in many cases, never worked again).
On the other hand, the outstanding success of the last 40 years, indeed of the whole post-Independence era, was the increase in employment between 1993 and 2004. The result was a huge reduction in unemployment and the advent of large-scale net immigration.
In a very short period, the disastrous failures of the 1980s had been turned around into one of the most remarkable success stories in the western world in terms of employment growth.
The figures pre-1983 are stark. The numbers at work in the Irish economy in 1993 were just 130,000 higher than 70 years earlier and actually below the 1983 level. Since Independence, the only period in which there was a significant increase in employment up to this was during the 1970s, when over 100,000 net new jobs were created.
Against such a protracted history of underperformance, the rate of job-creation from the mid-1990s was quite extraordinary. Between 1993 and 2004, over 650,000 net new jobs were created, an exceptional increase in employment in such a short period. A further 300,000-plus jobs were created between 2004 and 2008.
However, equally dramatic was the decline in employment since then. Between 2007 and early 2011, almost 350,000 fewer people were at work in Ireland. That said, the level of employment in 2011 is still way above that in 1993 and similar to that in 2004. As such, the huge gains in the decade from 1993 have not been lost.
However, employment growth between 2004 and 2008 appears now to have been illusory. The credit-based building boom could not be maintained and a large drop in employment in construction and other activities was inevitable. But the speed and scale of the decline surprised commentators.
The bursting of the bubble exposed underlying weaknesses masked during the boom years. From the early 2000s, Ireland steadily lost competitiveness, especially in terms of wage costs. By 2008, this loss of competitiveness had become acute, especially in the context of Ireland being a member of the euro zone.
Ireland has since recovered some lost ground, as measured by the EU-harmonised competitiveness index, but there is still a way to go. Strong employment growth cannot take place without further competitiveness gains. This includes competitiveness in the public sector; not just in terms of work patterns but also the tax cost of public services relative to elsewhere.
Equally important is addressing the phenomenon of long-term unemployment. This problem could persist even if competitiveness can be restored – a lesson learned painfully in the 1980-1994 period. Long-term unemployment in Ireland rose significantly between 1980 and 1994, rising from under 3 per cent to 9 per cent. A marked decline took place following this, falling to a rate of just 1.1 per cent in 2002.
This picture remained largely unchanged up to 2008, when the first rise in long-term unemployment was recorded. Between 2008 and 2010, there was a dramatic worsening of the situation, with the rate rising to 7.3 per cent in two years and the numbers in long-term unemployment more than quadrupling. The problem of the 1980s and early to mid-1990s had returned to Ireland in less than two years. This in many ways could be the most worrying legacy of the economic crisis of the last three years.
As far back as 1994, the OECD was unequivocal concerning the changes that needed to be implemented to deal with this most pernicious of problems. It suggested, for example, much better matching of workers to job vacancies, much more in-depth verification of eligibility for jobless benefits, and fieldwork investigation of concealed earnings and related fraud.
A more fundamental problem, it claimed was making unemployment payments, especially to the long-term unemployed, effectively conditional on availability for existing vacancies. In particular, it stressed that those out of work for extended periods should be expected to take any offer of employment. Moreover, and as happens in most European countries, it recommended that unemployment payments be withdrawn in the event of a refusal of a reasonable offer of employment.
The real concern is that if people drift into long-term unemployment, the problem becomes much more difficult to overcome. At an individual level, long-term unemployment may lead to significant deskilling, demotivation and demoralisation, making each person effectively almost unemployable, unless prompt and corrective action is taken.
The OECD in 2009 carried out a thorough evaluation of active labour market policies in Ireland, with many recommendations in relation inter alia to staffing in the employment services; the very low level of employment counselling; and the ineffectiveness of enforcement of availability for work requirements. The report noted that several large groups received benefit without formal requirement to be available for work, arrangements which are increasingly out of line with international practice. It also commented on the tendency for the implementation of administrative reforms to be very slow.
With the rise in long-term unemployment in Ireland in the last three years, the employment service (despite steps under way to establish Solas, as a replacement for Fás) seems far from fully geared up to deal with the return of this most worrying of labour market problems. Time is of the essence – otherwise the expected pick-up in the economy may, as in the late 1980s and the first half of the 1990s, lead to little reduction in unemployment and emigration.
Meeting the challenge of unemployment will bring relief on three fronts: to the debt problems (by raising gross domestic product); to the fiscal position (by reducing expenditure and increasing tax revenue); and, most important of all, of course, to the unemployed. This is what makes success in meeting this challenge the most urgent of policy objectives for this government.
John O’Hagan is professor of economics at Trinity College