Friday, November 04, 2011

Unemployment in Ireland

I will do the online Irish Debate session tomorrow (November 4th 2011) at 12pm. Below is an initial overview. The debate on unemployment in Ireland so far has been paltry. We really need to get something more substantive and sustained going on this key issue.

The most pressing problem addressing the Irish economy is unemployment. Seamus Coffey, in a blogpost on, points to the basic patterns of unemployment across demographic groups and regions. It is an issue across age-groups but most particularly for the young.

The extent to which youth unemployment is an issue has been discussed in a number of recent papers. Bell and Blanchflower have a number of recent papers arguing that this recession has disproportionately affected young people (see David Bell's IDEAS page). Youth unemployment rates across Europe have reached levels as high as 46 per cent in countries like Spain. In Ireland, the rate of 26 per cent among 20-24 olds is one of the most worrying statistics of the Irish recession, given the potential for early unemployment to lead to labour market scarring across the life-cycle.

In terms of a response to unemployment, a dominant view in the Irish case is that unemployment cannot be solved without a resolution to the fiscal and banking crises in the country. There is generally a great deal of suspicion of the role of active labour market policies and there has not been a strong impetus to actively respond to unemployment as an issue in itself. Dan O'Brien, economics editor at the Times, has a good piece on the extent of government inaction in this area. The problem with the inaction position is that there are well-known long-run costs to short-run unemployment and the duration of unemployment spells are becoming extremely high in a context where migration possibilities are low. The idea that the market should simply be allowed to work this through doesn't make any sense, particularly in a context where we spend an enormous amount of money already on unemployment benefits, job training and so on. Ignoring the issue, as is largely currently happening, is not the same as leaving it to the market. It is effectively not providing proper scrutiny, debate and ideas in the areas where this money is being spent.

To the extent that there has been a response, it has come on the following fronts. (i) The welfare payment and job assistance functions, previously located in different departments, have been merged. (ii) The state training agency, FAS, has been renamed SOLAS and some of its functions have changed. Technically, this has involved abolishing FAS and creating a new agency called SOLAS but its really not clear how different the new agency will be in practice (iii) Unemployment welfare payments to younger people were reduced in an effort to ensure that replacement ratios at that end of the job market were lowered. (iv) The government has created a pilot internship initiative called Jobbridge (website here), which seeks to match interns with employers. Interns are allowed to continue to claim welfare payments and are given a 50 euro per week top-up. This is one of a number of work experience type initiatives that have been attempted but is the first to be applied seriously. (v) Back-to-education initiatives have also formed a part of government unemployment strategy, including the HEA Springboard initiative.

In terms of other potential responses to unemployment, the papers by Bell and Blanchflower provide a useful backdrop. Their work argues for greater use of mechanisms such as internships, training initiatives, potential further raising of the school-leaving age, switching toward shovel-ready labour-intensive capital projects and repairs, cuts in pay-related-insurance contributions and providing greater evaluation focus to active labour market policies.

Unemployment cannot be understood properly within standard labour market models. There are psychological well-being effects associated with unemployment that have yet to be fully explained. Furthermore, there is a scarring effect of unemployment that must be considered when examining policies aimed at counteracting current employment (see the classic scarring paper by Clark and Oswald). Recent work by Alan Krueger and Andreas Mueller is showing marked patterns of psychological well-being reduction through the process of unemployment. A recent paper by myself and colleagues in the Geary Institute examined the experience of unemployment in Ireland from a psychological perspective. The psychological aspect of unemployment needs to be factored into new models of job activation in terms of creating job activation and welfare payment environments that do not demoralise people.

In the Irish case, all the recommendations discussed by Bell and Blanchflower should form part of the debate. With regard employer PRSI contributions, this is clearly an area the government should prioritise in terms of tax reductions at the earliest possibility. While a number of people have argued that the government should not use capital projects to stimulate employment due to their high cost per job (see Morgenroth paper), this view ignores the fact that the relatively high cost-per job of existing projects comes largely from their capital intensity and is not an argument against switching money to a national repairs programme. The recent OECD conference on jobs held in Dublin gave another set of more long-term directions to examine, including the importance of early intervention. The paper produced from the event is a useful input into the policy debate in Ireland.

The development of a full response to unemployment is an urgent priority. It should take into account the long-term costs of unemployment to the person and society. It should draw from literatures in different disciplines. It should embed good principles of design and evaluation. It should have a great urgency and focus.

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