Monday, May 04, 2009

Young Adults and Recession in Ireland

Apologies for those that prefer the blog stick purely to journal articles, dem's is the breaks. Economics informs policy and the world is changing fast. Anyone conducting empirical research in areas like health, education, employment, well-being and so on who isn't thinking about the current developments is in danger of making themselves obsolete.

There are a number of reasons to believe that this is going to be a particularly tough recession for people aged 20-40 in Ireland;

- The public sector recruitment embargo is going to close off a major channel of employment for people seeking to enter the labour market.

- Downward wage adjustment among senior people in public and private sector will be far too slow, and many firms and departments will opt to maintain existing staff at as close to existing wages as possible and will not take risks with new talent.

- The traditional migration channel is far less of an option due to the global nature of the recession.

- While falling house prices is a national phenomenon, even a moment's reflection will illustrate why this is more of a problem for younger buyers. Younger couples who purchased since 2003 (being conservative) are likely to enter negative equity. For those who purchased in the 80's and 90's (i.e. older people) this is not an issue. Ronan Lyons talks about this on his blog and gets the ball rolling on discussion of this issue admirably (though, as Ronan acknowledges much work to be done in terms of the correct data to use).

- The employment responses announced in the budget are timid and not designed to tackle this issue in any depth

- While Peter Bacon and Brian Lenihan are receiving strong scrutiny from people like Karl Whelan on the issue of NAMA, there has been a paltry public debate about the role of agencies like FAS, and following a few weeks of negative publicity, FAS has largely dropped out of the loop. The Unemployment Commissions set-up do not seem to have a presence yet, at least one that I can see. Major government documents dealing with economic recovery were largely long-run strategic documents developed before the current crisis and certainly had no element of short-run employment stabilisation built in to them. In general, the lack of a sense of urgency would suggest that we will enter the summer recess without any major policy being decided in this area. There will follow six months of tough adjustment with, by sensible estimates, an increase in unemployment to about 13 per cent coming up to the Budget. In short, one reason for believing this will be a tough recession for young people is that they do not seem to be on the policy agenda.

- The development of housing during the economic boom in Ireland is now widely acknowledged to have been poorly planned. Many of the young couples that bought homes during the regrettable late phase of this era did so in places they never would have expected to live in on a long-term basis. Many of these areas are not properly designed for family living and many of the people living in them viewed them as temporary stops on a way to a better home once their property values and salaries increased. This leaves a coordination problem to the extent that some of the apartment buildings and estates that are particularly poor may never recover in value, thus further reducing the motivation to invest in these areas. This starts as a problem for young people but potentially has widespread social ramifications. Morgan Kelly has talked on a number of occasion about demolishing some of these estates and apartment blocks. To date, I have not read any serious proposals on how to deal with or even conceptualise this issue.

- Negative equity for younger people is a serious strain on recovery. It places a strong constraint on labour mobility for a start and also adds to the strong possibility of default from people whose jobs come under strain. There is also likely to be a correlation on a regional level between the extent of unemployment and the extent of house prices falls. This potentially compounds the problem and may lead to serious issues in terms of concentration of financial strain. I should say that the phrase "negative equity" is a phrase that is often used to suggest an incurable terminal illness that uniformly destroys all afflicted with it. If you are living in your house, had no intention of moving and your salary has not been affected then depending on the extent of depreciation, you may not even notice this until you retire. People who bought later in the boom and who are facing employment uncertainty are the ones that need to be thought of in terms of a policy response.

It is time to start thinking fully about the policy issues surrounding first-time buyers who purchased since 2003. In previous posts, I asked for ideas on graduate unemployment. I will post at a later date on unemployment among non-graduates, a literature that is far more developed. The home equity issue is the other major strain making this a young-person's recession in all but media coverage.


Enda said...

I once laughed at Labour's suggestion of a 2 year moratorium on house repossession: why would anyone bother to pay their mortgage?

I haven't thought about this much but I think one way to deal with the negative equity/labour mobility issue is to have a condititional moratorium if you've lost your job. In this position it's possible that young couples could move from their 3 bed semi-d in Ratoath to wherever there might be a job in e.g. Cork. They could leave the house idle and have the mortgage suspended for a couple of years while they rent in Cork and save to prepare themselves for having 50k negative equity on their heads in 2 years' time. It would remove some of the uncertainty from their decision.

Yes, this will leave houses lying idle. But that's no different to what we have at the moment anyway.

Liam Delaney said...

ok - at least a start. but there is a whole global literature on how to deal with people who cannot meet their mortgage payments. Worth seeing if there is a recent review of best practice. Worth also seeing the Obama policy in this area. The UK policy is far more hawkish than in Ireland and repossessions are much more common. In Ireland, we are in strong danger of trapping a very productive group of the population in areas where job prospects are not going to pick up.