Wednesday, December 16, 2009

How Important are Recent Declines in the Labour Force for Understanding Unemployment?

The RTE website reports that the unemployment rate climbed to 12.4% in the third quarter of 2009. This is in keeping with recent indications from the Live Register. The report on the RTE website is based on the CSO's Quarterly National Household Survey (QNHS) - available here. The Irish Times reports (here) that the rise in Q3-2009 represents the smallest quarter-on-quarter increase in unemployment since the first quarter of 2008. Similar observations have been made in relation to previous rounds of the Live Register. The Irish Times notes however, that "commentators warned against reading too much into signs of a stabilisation in the unemployment rate, with Davy’s Rossa White pointing out that a decline in the labour force rather than an improvement in the employment trend, was the primary factor behind the slowing down in the rate of increase."

So what are the most recent annual decreases in unemployment and the labour force? There were 1,922,400 people in employment in the third quarter of 2009; which represents an annual decrease of 184,700 (or 8.8%). There were 2,202,300 persons in the labour force in the third quarter of 2009; representing an annual decrease of 64,300 (or 2.8%). The labour force decrease compares with an annual labour force growth of 0.6% (or 13,500) in the third quarter of 2008. So compared with this time last year, there is certainly much more downward movement the labour force. This can be seen in the chart below, taken from today's QHNS publication. (The chart can be clicked on to see a larger resolution).

According to the CSO, "the decline in the size of the labour market is largely attributable to a decline in participation of 53,600, as represented by the fall in the participation rate from 64.2% in Q3-2008 to 62.5% in Q3-2009." The participation rate (as defined by the CSO) is 'the number of persons in the labour force expressed as a percentage of the total population aged 15 or over'. In addition to changes in participation, the labour force is also affected by changes in the number of persons of working age in the State (the demographic effect). Also from the CSO: "Up to the start of 2008 this demographic (was)... primarily driven by net inward migration. With the decline in inward migration the demographic effect has declined through 2008 and became negative in Q2-2009. In Q3-2009 this negative demographic effect contributed 10,600 to the overall annual decline in the labour market."

In summary, what we can see in the table above is the importance of following trends in the data-rows which show "in labour force" and "total persons aged 15 or over". Furthermore, if one compares the first 5 columns in the above table (with the final two columns), a number of points are apparent:

(i) A marked slow-down in unemployment
(ii) An increase in labour force size comparing Q1-2009 to Q2-09 and Q3-09 (however, there is still a notable decrease in Q3-09 when compared to Q4-2008)
(iii) A fall off in persons of working age i.e. "total persons aged 15 or over"

Finally, is there anything to the claim that a recent decline in the labour force (rather than an improvement in the employment trend) is the primary factor behind the recent slowing in the rate of unemployment-increase? Looking at the figures from a year-on-year perspective (Q3-08 vs. Q3-09), we can see that the labour force has shrunk, and much more so than the fall-off in persons of working age. This suggests that labour force decline is limiting the increase in the unemployment rate more than emigration, at least for now. However, it must be remembered that in September of this year, the CSO announced there was a return to net outward migration for Ireland (-7,800 in the year to April 2009) for the first time since 1995. Of the 65,100 people who emigrated in the year to April 2009, Irish nationals totalled 18,400. This figure is roughly one tenth of the reduction in the number of employed individuals during the Q3-08 to Q3-09 period (184,700).

But is labour force decline the primary factor behind the recent slowing in the rate of unemployment-increase? The reduction in the size of the labour force during the Q3-08 to Q3-09 period (64,300) is roughly one third the size of the reduction in the number of employed individuals (184,700); and more than three times the outflow of Irish nationals in the year to April '09 (18,400). There is no doubt that the recent decline in the labour force (64,300) is a contributory factor in the recent slowing of unemployment-increase; however, it is not the primary factor. The primary factor seems to be that the country is simply losing jobs at a slower rate than in previous quarters. Despite this, it is important to remember that we are still enduring increments to an unemployment rate that is absolutely large.


Michael Breen said...

interesting stuff Martin.

There is a new article over at vox eu on predicting unemployment trends using google:

wonder could be it be applied to an Irish context....

Martin Ryan said...

Thanks for the link to the Vox article Michael. I've been following the literature on Google-search data and unemployment, but wasn't aware of the work by D'Amuri and Marcucci.

I thought about how this might play out in an Irish context before, from the point of view of individuals searching for information on the dole, rather than getting a new job! Some details are available here:

Martin Ryan said...

Austin Hughes, chief economist with KBC Bank, has commented on how the decline in the labour force could be feeding into more demand for higher education:

"...the number of adults who are in the jobs market has shrunk by 1.2%. The most significant fall in labour force participation has been among those in the 20-24 age group which may suggest increased participation in higher education," Mr Hughes.

Read more: