Working away at becoming a service economy

Since the peak of the boom early in 2001, our economy has grown much more slowly than during the eight-year Celtic Tiger boom…

Since the peak of the boom early in 2001, our economy has grown much more slowly than during the eight-year Celtic Tiger boom, writes Garret FitzGerald.

Yet our 2 per cent annual growth rate has matched that of neighbouring Britain, and has been somewhat better than that of our Continental EU partners.

In the ordinary way it was to be expected that, with growth of output cut back to that level, employment would have stagnated.

Surprisingly, however, employment has continued to rise during this period at about the same rate as output.

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Of course this means that there has been no increase in output per worker since then, and, as average pay rates have been rising by 5 per cent a year, we have been losing competitiveness quite rapidly.

This problem has, moreover, been aggravated by the fact that since March 2001 the euro has risen by 40 per cent vis-à-vis the dollar.

The latter factor does not affect exports to most Continental EU countries, which now account for two-fifths of what we sell abroad, but the volume of our exports to these countries has stagnated for a different reason: because of the sluggishness of their economies.

What are our employment prospects for the years ahead?

Last summer the Economic and Social Research Institute (ESRI) produced estimates for future employment here based upon its projections for economic growth to the year 2010.

The institute does not expect employment to grow at anything like the rate achieved between 1992 and 2001, a period in which the numbers at work rose by an astonishing half a million, or an average of over 52,500 a year.

A more modest annual increase of 35,000 a year is the ESRI estimate for the years to 2010, although this could be dependent upon some recovery in our competitiveness.

This employment projection takes account of the fact that none of the special factors that enabled us to achieve such a huge increase in employment in the 1990s apply in the present decade.

Thus the number of young people completing their education, which in the 1990s was being boosted every year by the fact that our birth rate had been rising through the 1970s, is now falling - reflecting the one-third decline in the birth rate that took place after 1980.

Moreover, the flow of women from work in the home into paid work has also slowed considerably and, with unemployment now below 5 per cent, we can no longer draw on that source for an increased labour supply.

Finally, future immigration could be hit by the greatly increased cost of housing.

With much smaller annual additions to our workforce, our economic growth rate to 2010 is expected to fall back from the Celtic Tiger 8 per cent a year to an annual 5 per cent. Although perhaps during the immediate aftermath of the recent recession it might temporarily exceed that figure in 2005 and 2006.

The composition of the smaller annual employment increase over the next seven years is also likely to be very different from that which we experienced during the Celtic Tiger boom.

Key features of the decade from 1993 to 2003 were a net increase of two-thirds in the numbers employed in hi-tech industries - one quarter of which was temporarily lost during the recent recession; a trebling of construction employment; an increase of two-fifths in employment in the distribution sector, which includes hotels and restaurants; an increase of one-half in employment in transport and communications; of two-thirds in the non-market service sector, (mainly public sector employment in education, health and public administration); and four-fifths in market services.

In the years ahead, employment in the high-tech sector is unlikely to do much more than recover to around the level attained in 2001, and employment in indigenous manufacturing will probably remain unchanged as, indeed, it did during the Celtic Tiger period.

Thus manufacturing employment will no longer provide the dynamic for growth as we move to becoming a service economy.

In the years ahead the dynamic sectors are expected to be market services, transport and communications, and the public sector, especially health and public administration.

The last couple of years have seen very substantial increases in public employment, especially in the health services, where the numbers at work have increased by 26,000, or one-fifth, albeit with little visible improvement in the scale or quality of the services.

A major reform of the health system will be needed if the further increase of over 60,000, or two-fifths, in employment in health services foreseen by the ESRI is to secure the approval of government or of public opinion.

This shift in the main thrust of employment creation away from industry and towards services has significant implications for education and training.

A recently published study of this subject, carried out jointly by FÁS and the ESRI, suggests that the fastest increases in demand for labour in the years ahead are likely to be for carers, health professionals, business and legal professionals, and science and engineering professionals.

The demand for skilled manual workers, other than maintenance workers, and for unskilled workers is more likely to fall.

This pattern of future employment requirements is much more skewed towards higher education than in the past.

The FÁS/ESRI survey concludes that no less than three-fifths of the new jobs in the next seven years will require higher education, and that almost all the rest will require upper secondary education.

This emphasises the urgency of making progress with raising the proportion of school students completing the Leaving Cert from the figure of just over 80 per cent, at which it seems to have got stuck in recent times.

When allowance is made for the need not just to fill new jobs but to replace people retiring, this study estimates a third-level education requirement of 300,000 between 2001 and 2010, or some 33,000 a year.

It goes on to add that during the 1990s some 175,000 Irish people with third-level qualifications entered the labour force, and some 25,000 re-entered, (presumably women returning after a period when they were engaged in childcare).

In that period the deficit of 110,000 people with third-level qualifications had to be supplied by immigrants.

It is unsatisfactory that such a high proportion of our third-level employment needs have had to be met by immigration.

We ought to be able to supply a much higher proportion of our need for people with third-level education by educating a sufficient proportion of our own young people to that level.

But that will require a significant shift in current attitudes towards higher education in the Departments of Education and Finance.