Wednesday, September 22, 2010

No Silver Bullet

The response on unemployment since the start of this recession has been truly dismal. Short-run labour market policy is not a priority of the government and neither Fine Gael nor Labour have put out anything serious in terms of labour market adjustment. Various parties and academics have outlined strategies for longer term economic recovery and stabilisation but short-run labour market adjustment has been remarkably absent from the wider discussion. Brian Cowen met today with various different state agencies to discuss job creation.  I don't know what this harbours but it is way past time to have a serious review of government policy in this area. At the start of this recession, various people put forward the view that no policy to counteract unemployment could have an effect and that we needed to let nature take its course. Many of them cited the failure of adjustment policies in the 1980s. The history of the 1980s was a history of poorly thought-out labour market strategies aimed an older cohort of people who were long-term unemployed. We are coming close to a self-fulfilling prophecy in that it is now likely that major policy in this area will only take place long after the bulk of the current cohort have become long-term unemployed.

I am conscious of sounding like a broken record on this and I am also conscious that nobody, as the Taoiseach points out, has a silver bullet to make this problem go away. But just in case people have forgotten - unemployment is the worst thing the economy can do to you in terms of affecting your mental well-being (or utility if you prefer). It has effects as large as chronic illness and it spreads in the sense that there are intergenerational patterns and whole regions can embed norms of unemployment. Duration is particularly important and, while different studies give different results, durations above a year are particularly hazardous in terms of longer term effects. Some of my libertarian friends point out that no-one has the right to expect a job and it is duty of the individual to seek work and not to expect work from the state. That is fine and good, but it is not an argument you can levy at someone who has paid their taxes to support a large state that includes a whole host of expensive institutions designed to perform this function. If these institutions exist, they should be accountable.

There are a range of policies that could counteract unemployment in Ireland. Anyone looking for a clearly revenue neutral policy with certain returns is demanding a standard that does not exist in any area of government policy and is not possible in a situation that has few precedents. Many of these policies e.g. capital programme redeployment are clearly revenue neutral and may be positive in terms of larger domestic multipliers. I have reading lists for almost all the points below is anyone is particularly interested.

1. We need to have a debate about the minimum wage for younger people.

2. The potential for work experience programmes has not been discussed widely at all. It has to be remembered that a lot of 15/16 will be growing up now in areas where unemployment is becoming increasingly the norm.

3. Similarly on the graduate side, the IBEC internship programme looks promising and is an idea that could have a marked effect on graduate unemployment. A few people told that some of the people on the scheme started to get a little fed-up after spending six months on such low salaries. This is a good sign. The purpose of these internships are not to condition people to want to work for free but rather to make sure that people get through their first couple of years after college with a good CV.

4. The potential for diverting capital funding to labour intensive repair work, subject to the need and economic rationale of the work, should be explored in much more depth.

5. It is worth examining the age of retirement for the current cohort of people in their 50s. While many of use now face an age of retirement of 68, most of us started working somewhere between the age of 18 and 24. Compare this to the situation of a manual worker who has been laid off at age 59, having worked since leaving school at 12.

6. Other than media stories about expenses, there has been no serious review of how FAS and the Department of Social Protection actually function in terms of promoting an active labour market.

7. We need more work on the potential Oswald effect in Ireland. I will use this post to apologise to Ronan Lyons, with whom I have an, as yet, unpublished paper on this issue. The Oswald effect arises when people are tied to their home and cannot migrate to better employment areas as they cannot sell their homes because of negative equity. My paper with Ronan is still unpublished because the data to test this for Ireland is just simply inadaquate and we have not agreed on how to talk around the patchy data we have. In either case, Ronan has already clearly documented the potential extent of negative equity in Ireland and no-one yet has addressed this as a labour market issue.

8. There needs to be more emphasis on hiring in the public sector if the economy recovers rather than restoring paycuts.

9. I am going to float the idea of a "jobs tzar", who would be a recognised international expert on labour market design and would force all the current policies to obey rigorous standards of design and evaluation and actually make the results of these available.

1 comment:

Martin Ryan said...

I have the following comments:

1. Are education and training programmes the best use of any available funds? Getting one of these places is undoubtedly a positive experience for the potential participants, however, education and training do not guarantee subsequent employment in current labour market conditions.

(The other Government policies in this arena have been flagged by me before: Employment Subsidy Scheme, Revised Work Placement Programme, New Activation Fund and changes to the jobseeker’s allowance and supplementary welfare allowance schemes.)

2. The Employment Subsidy Scheme does not reduce unemployment; it is about retaining jobs that might otherwise be made redundant.

3. The Work Placement Programme (WPP) has a maximum duration of 9 months. While participating in the WPP may make participants more employable, there is no guarantee for subsequent employment in current labour market conditions.

4. Last year's changes to the Jobseeker’s Allowance and Supplementary Welfare Allowance may seem quite harsh, but reservation wages may currently be too high. This is an area that at least deserves more research. It is worth reflecting on how we might expect the relationship between unemployment benefits and reservation wages to change over a boom-bust economic cycle.

5. In a previous occasion Liam drew my attention to a Forbes article by Chicago economist Steven J Davis, which outlined ideas to reduce unemployment. My interpretation of the Davis approach is to temporarily reduce the extent of labour market regulations: to make it cheaper for employers to start hiring again.

6. As Kevin has noted before, a lot of the evidence around cutting the minimum wage, tightening the benefit system and monitoring search effort more closely may come from economies that are closer to the equilibrium rate (of unemployment). However, I still think this evidence is worth examining.

7. Finally, Brendan Walsh's paper "Cyclical and Structural Influences on Irish Unemployment" (Oxford Economic Papers, 2000) describes the massive reduction in Irish unemployment over the course of the 1990's. Competitiveness, the generosity of the social welfare system and the wage bargaining process are all discussed.

On the issue of a 'jobs czar', there was an article in Newsweek earlier this year, reporting that Los Angeles City hired someone to fill that role:

"To help get Angelenos working again, Los Angeles Mayor Antonio Villaraigosa chose 49-year-old Austin Beutner, a former partner at the Blackstone Group and cofounder of the boutique private investment-banking company Evercore Partners. Beutner accepted the job in mid-January with a salary of $1 a year. Officially, his title is first deputy mayor, and he's charged with overseeing job creation in the city"