Friday, February 13, 2009

Unemployment - Economics and Psychology

from time to time we have a policy focus on this blog and I ask for specific posts. I have blogged extensively about unemployment on this blog but in my lectures recently when I am debating with students about what could be done in the current environment I am struck by the lack of ideas that have been generated on this issue. Many of the undergraduate students are viewing doing a masters as being the way to ride things out and its very difficult to argue with this view but what then?

Our blog is not the place for wider spread political discussions, but if you consider that there are approximately 350 thousand people out of work in Ireland it seems that everyone with any claim to be connected to economics should be thinking and debating what to do. It is amazing that our main state training and employment agency doesn't even currently have a Director and this gives a basic feel of how unemployment is not receiving its share of attention. When it does get attention, the emphasis is on documenting the dissappointment of being made redundant and the fear and uncertainty people face with less attention given to ideas to do anything about it (though in fairness the RTE site does contain some useful information for people who have been made redundant).

The establishment of an unemployment taskforce may redress some of this balance but for the forseeable future our economic debate looks like it will be almost exclusively devoted to documenting and analysing the failures of our financial system.

From the point of view of what economics has to say about unemployment, some of the following considerations are worth thinking about.

- what are the potential long-run costs of unemployment? There is abundent evidence for short-run unemployment leading to unemployment persistence, psychological scarring and lower long-terms wages. Is there anything that can be done to counteract such effects either by individuals themselves, companies or government programmes? How would such interventions differ by age and other circumstances of the individual? What are the characteristics and behaviours of individuals who make it through periods of recession-based unemployment without long-term effects on their career?

- How should career advice structures react in colleges and schools react or do they have any role or effectiveness in such situations? Are there broader networks that could be utilised to ensure that students do not end up making sub-optimal choices during a downturn? Gerard O'Neill and some others have suggested setting up alumni networks whereby alumni who wanted to contribute other than by cash could offer mentoring to students.

- is there a way to shift fiscal spending around toward more labour intensive programmes that have longer-term benefits?

- what is the role for internships? Can the government work with companies and universities to rework unemployment payments so that companies are given the equivalent sum as an incentive for hiring individuals? Can this be done without displacing the current workforce? The British are moving to something like this but I cant track down their document.

- how effective are current programmes being conducted by organisations like FAS? Are there others that could be tried?

- what role is there for organisations to work with their employees to cut hours instead of jobs. Is this a more desirable strategy from an aggregate point of view?

- what role can wages play in adjusting the current labour market? If prices are falling, will it be possible for people to price themselves into the labour market by reducing wages? What implications would such a strategy have in a country with very high levels of private debt?

- what role is there for independent financial advice consequent on unemployment? There is abundent evidence that people make poor financial decisions when subject to elated or depressed mood states. How optimally do people use redundancy payments? Does financial advice help people to smooth between bouts of unemployment better? For example, are people managing their debts optimally consequent on being made redundant?

- what programmes for encouraging people to start their own business consequent on being made unemployed have proven effectiveness or most likely chance of success? Do they have any role to play in a global economy with such depressed demand levels?

- what is the psychological impact of unemployment? Are there psychological programmes that are cost-effective and have a proven benefit in alleviating psychological suffering and improving labour market outcomes? For example, should the recent British emphasis on Cognitive Behavioural Therapy be examined more closely?


Ronanob said...

I think the idea of going for a masters simply because there is no jobs isn't the answer. There could be a fear that when they get their masters that they would then become over qualified. I believe that in this economics re adjustment the leaders of the next bubble are starting the ground work and there's never been a better time to start building or get in on the ground floor with business' that profit in downturns - If you can.

"how effective are current programmes being conducted by organisations like FAS? Are there others that could be tried?"

I've been doing some hiring last week and the reaction we got from FAS was - sorry there is no money in the system so there can be no incentives given. Does the Government really prefer them on the dole??

If i were a student in your lectures my suggestion would be simple. LET THE PEOPLE WORK, allow people to keep their benefits and if they can find jobs (anything at all) then work away at that too. Run the numbers so that is they CANNOT ever be worse off by working. But they pay a higher tax (50% plus) if they earn and take dole. At least they are contributing to economic recovery and their own dole. I wrote a post on this exact topic a while ago so rather than ramble on my personal thoughts are here:

Another thing the gov should do is partner up with SME's to pay half new recruits wages (or offset it against VAT due on sales) in high dole growth area's if the SME has export potential - after all the money will end up in the persons hands either through free hand outs or if they earn it. And given the option i believe people prefer to contribute in exchange for money.

Liam Delaney said...

the big issue that people point against massive direct employment stimulus programmes is that employers will simply displace existing staff. For example, one of my business students raised the idea that many reasonably paid people would be substituted for cheaper government sponsored interns and that the net effect might even be negative on employment. This point has been raised a number of times in connection with these types of schemes. This is why I am so keen to read the British document when its forthcoming as I am sure there are mechanisms that could be designed to make it optimal for an employer to take advantage of benefits for hiring previously unemployed recruits without shedding existing staff. Given that you are running a business Ronan, you might have some thoughts on the incentives here.

Ronanob said...

Think of it from an employers perspective - the gov should put enough restrictions that they will unquestionably win -win from such an arrangement. A business must spend several hours to several days applying for grants so why not the same qualification system for employee grants.

So some suggestions could be:

1. Must be a start up in their first 1-5 years - high risk to employ new staff and high potential for business growth.

2. Business must be more than 3 employees and less than 12.

3. Business must maintain or increase its current number of staff.

4. Sound fundamentals for the particular subsidized staff member to impact the bottom line at least two times their wage investment.

5. Wages paid not by Gov but claimed back against VAT - ie. Proof of companies earnings.

6. Doesn't have to be 100% subsidized, could be anything that makes the numbers work. "Hire one get one free", incentive!

The reason for this is that there are many small businesses that could be large businesses, but the owners are, sensibly, unwilling to risk the survival since the success is not as appealingly powerful and the fear of failure. Limit the downside risk and you automatically increase the uptake of potential success.

I'd rather my see my taxes being spent on potentially letting someone help create a paid job for life than just given to that same person as dole. To me its a no brainer.

Martin Ryan said...

In relation to unemployment, its interesting to consider the view that emerged in recent months ---about how Keynesianism may be more appropriate than expanding the monetary base, at least for large economies that aren't extremely open.

Of course, notwithstanding all of the above, there is the fear that a stimulus package in Ireland would be ineffective, due to our small size and extreme openness.

However, if the emphasis is on the importance of job-creation, then why not strive to produce a stimulus package (relatively!) comparable to that of the US, or at least the UK. Where the stimulus would be focused on re-training, paid internships, free college courses in strategically important areas such as IT, and so on.

As Liam mentioned in another post this week, if you invest in roads it is considered capital but we consider education current spending. We need to think about large scale education (and re-training) programmes as investments, and to accordingly fund them with long-term borrowing.

Tony Moore said...

There are 338 or so elctied council positions comming up for grabs in june. Nominations have to be made in May. The wage is 31k if you are currently unemployed. It might be worth your while going up against the current encumbant if you have nothing else to do and you could get plenty of help among those on the dole with you. I belive its time for a regime change in this country and who else to do it then those at the coal face of the down turn. By getting elected at council level will send a messege to the current parties that a new direction is needed and it would also give these woodbee polititians an aprentiship for the next general election.