10 years on from the onset of the crisis we could take some time to take stock. The government is keen, as are many, to wipe it from memory – keep the recovery going. The recent undoubted recovery has softened memories for the most part. But if we forget the past we will sure as eggs forget the lessons of the past.
A perennial trope of the Irish economic debate is that of the “Smart economy”. This is to be contrasted one imagines with the “dumb politics”. So how smart is the economy?
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This is a version of my Irish Examiner Column of 8 March 2014 . Spring is in the air and the economic sap is rising. Or is it that economic saps are rising? Anyhow, the other thing that spring brings is growth and it does look as though finally those long hearalded green shoots are showing in the Irish economy.
Green shoots are tender however and a blast of frost can seriously damage them. The world is unpredictable – who last month would have foreseen the invasion by Russia of another country and the lurching back to the cold war rhetoric that we have seen. Geopolitical scares aside, the notion that we are out of the woods is scarcely believable when one looks at the hard data in toto. The labour market looks good – more on this anon. But we are celebrating the recovery of the two pillar banks in a week when they announced that between them they had lost an aggregate €2.2b in 2013. Even the minister for finance, while lauding the return to normal banking (huh?) did opine that perhaps we needed a third banking force in the state. Normal banking is not one in which an effective duopoly, two main competitors, exist for all bar the largest companies, where these two are lumbered with losses and unable to fully engage in credit creation and where shadow banking entities take their place. That’s wholly abnormal.
But at least unemployment is falling. Much was made of the fact that the headline figures for unemployment fell below 12% and 400,000 persons, important psychological barriers. Indeed, much was made that we are now below Euro area averages for unemployment. But 12% overall masks the reality – we have seen the renewal of mass emigration and we have 85,000 people on jobbridge and related schemes. We have in other words again and again failed to provide meaningful employment opportunities for our citizens.
The hope of the government is, seemingly, pinned on high-tech , start-ups and construction. Lets think this through. While in the last while there has been a boom in entrepreneurship, the reality is that this is not going to solve the problem. The bulk of job creation comes not from startups but from small companies becoming medium sized. We need to switch our focus from the S to the M in SME. We need to create an Irish middlestadt sector. In Germany these companies are the backbone of the economy and of the export engine. We need to determine what it is that we are good at doing and focus on growing indigenous companies to go from 5-10 jobs to 50-100. In terms of construction we need to be careful for what we wish. All the straws in the wind point to a deep seated desire on the part of the powers that be to reignite a property led growth strategy. This is folly of the rankest kind.
And then there’s the high-tech sector. Looking at the most recent data, Q4 2013, we get a pretty good picture of how the Irish employment situation has changed over the last decade. The EU have a classification of employment in to high tech etc. It makes for sobering analysis. In 2004 employment in what the EU classify as High-tech manufacturing accounted for 3.4% of the labour force or 71,000 persons. By end 2013 this had fallen both as a proportion, to 3% and in absolute terms to 57,000 persons. High-tech manufacturing is he pharm, chemical and computer industry areas that are neither job nor tax creators for Ireland. The high-tech financial services industry has while shedding 5000 posts since 2004 from 93000 to 88000 persons increased its share of the employment cake from 4.4% to 4.6%. The largest rise in any hi-tech area comes in what is classified as Knowledge Intensive Other services, rising from 481,000 persons to 541,000, from 22.9% to 28.4% of the labour force. This is dominated by the health, education and arts/culture sector.
Then as now the bulk of those employed are in the “other” sector, other by reference to knowledge intensity/high tech. The others are dominated by the retail, construction and distribution/logistics sector. Of these only one seems to be in the forefront of the governments mind. Retail employs just under 10% of the workforce. It is in fact the largest employer percentage wise. Combined with the hotel and catering industry this accounts for 15% of employment. That is where we can create large numbers of posts. Despite the noise, retail sales are still very impaired. recent upticks in retail sales are driven mainly by the motor trade (which accounts for less than 2% employment). Excluding this we see a <3% rise in volume of sales and less than a 1% rise in value on a year on year basis. Until aggregate demand increases we will not see a recovery here.
Focusing on construction may be understandable. Looking at the live register 83000 craft and related and 65000 plant and machinery workers constitute the bulk of the register. Most of these are over 25, and the reality is that in the vast majority of cases do not possess the skillsets to thrive in the modern economy. This does not mean that we abandon them but it does mean that continued long-term unemployment is a real likelihood. That is not an excuse however for a focus on construction. We do not need to see a situation such that we have persons drawn from school or training at an early stage into a cyclical sector. But that is what we run a danger of doing with this focus.
The Irish Times today carrys a report that the Department of Social Welfare will soon contact all 400,000 people on the live register to explain that they would be better of working. Which seems fairly obvious
The report is interesting in that it first of all was and is still in the print version headlined “75% would be better off working” but was amended to “only 3% better off not working”. I wonder why. The report, says the Dept in a response to me (reproduced below) is not new. It is this report.
Now, that report is excellent. It looks at replacement rates (ratio of what you get on welfare to what you get on work). The 75% statement seems to come from the analysis of table 3 where the authors state “about three quarters of the recipients on Jobseeker’s payments face a replacement rate of less than 60 per cent”. In english this means that in the simulated labour market they develop someone on Jobseekers would get 60% of the predicted wage they would get.
The welfare situation is complex. The replacement rate is a fine and dandy tool to benchmark what you get in position A vs B. The problem is that the report and the letter campaign will be spun as “get of yer asses and get a job” . In a classic case of transference the (nominally) socialist Tainiste suggested young people should not be “in front of flat screen TVs”, echoing Norman (assuredly not socialist) Tebbitt and his exhortations to the unemployed of the 1980s to “Get on yer bike”
Here however is the problem..are there JOBS for these layabouts to drag themselves to instead of watching Jeremy Kyle and reruns of Americas Top Model? Focusing on the replacement rate is a classic case of supply side initiatives. But the other half of the issue is Aggregate Demand. From the Budget 2014 we see that domestic demand, which will drive jobs more than hoped for hightech exports, is calculated to be at best sluggish, at 1.4% to 1.1% pa for the next few years. It would be nice if we could have media and government that acknowledge that supply and demand work together.
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The reference to ‘75% of people on welfare could increase their income by about 50 per cent by obtaining a job’ is from Live Register analysis and has been cited in a response to a recent parliamentary question (see below).
The separate research from the ESRI, is publicly available and the title of the study is “Tax, Welfare and Work Incentives’.
PQ – 17th October, 2013
Deputy Peter Mathews asked the Minister for Social Protection her plans to ensure that persons are financially better off in employment rather than on welfare; and if she will make a statement on the matter. [43140/13]
Response from Minister for Social Protection (Deputy Joan Burton):
The replacement rate for given income levels is a tool used to measure the degree to whichout-of-work benefits when unemployed replace take home income from work. While there is no pre-determined level of replacement rate, which would influence every individual’s decision to work, higher replacement rates may indicate lower incentives to take up employment. In this regard a replacement rate in excess of 70% may be considered to be excessive. The Department will shortly make available an online “Better Off in Work” ready reckoner which will give an indicative estimate of the difference between a customer’s potential in-work and current out-of-work payments based on information input by the customer. I expect this to be of significant practical help to jobseekers. Replacement rate analysis, as supported by research by the ESRI, demonstrates that the great majority of people on the Live Register have a strong financial incentive to work and significant numbers leave the Register each year.
In this regard it may be noted that almost three-quarters of the people on the Live Register are only claiming a personal rate for themselves. They are either single or may have a spouse or partner who is working. In addition, 53% of the people on the Live Register receive less than the maximum personal weekly rate.
High replacement rates are generally associated with a relatively high number of dependent children and/or receipt of rent or mortgage supplement. However, it is important to note that only some 9% of persons on the Live Register are in receipt of rent supplement, with a further 1.5% in receipt of mortgage interest supplement. The vast majority of jobseekers do not receive these additional supports. Significant moves have already been taken to address the impact of housing entitlements upon replacement rates. Arising out of commitments in the Programme for Government to review the operation of the rent supplement scheme, proposals to integrate the systems for providing rent supplement and social housing support have been advanced. It is intended to transfer responsibility for the provision of rental assistance to persons with a long term housing need from the Department of Social Protection (currently provided through rent supplement) to housing authorities using a new housing assistance payment.
The effect of this transfer and the introduction of a new form of housing assistance payment will be to address one of the significant disincentives to accessing full-time employment that exists under the rent supplement scheme. This will have a positive impact on replacement rates.
One of the arguments that many (including yrs trly) has adduced for negative equity in residential housing being a problem is that it may well reduce mobility. Economists talk about matching – jobs exist and people exist who could fill them but can they be matched and what are the impediments to that. Negative Equity if it reduces mobility will act as an impediment to matching. That it has an effect on consumption seems reasonable and is I suggest agreed. But the issue of its effect on mobility is rather more complicated, from the research. People who face negative equity may be unwilling or unable to move for reasons of equity issues – the sheer financial constraint of seeking in effect an additional loan or because of the well known propensity for people to show loss aversion and unwillingness to sell an asset that has declined.
First lets look at the Irish situation. Recent central bank analyses suggest that as of 2010Q4 some 31% of mortgages are in negative equity, with this concentrated in loans originated at the peak of the bubble. These account for some 47% by value of loans. This is a lot. Even allowing for the fact that only about 40% of households have a mortgage we still face a situation where between 10-15% of all households have loans on their homes which are greater than the value of these homes. And house prices have fallen since 2010q4 by approx 25% suggesting that we could be looking at the high teens as a percentage of all Irish homes in negative equity.
We also face a massive unemployment crisis. One part of the solution is for people to move where the jobs are. Despite this being a small island that may well involve movement of a family home. A historically proven Irish approach is to emigrate. Again this may well involve a desire to sell and repurchase or otherwise use funds in the new locale. Neither of these are easy to say the least if there is negative equity, as in effect one is seeking an additional loan in a credit crunch. As to the extent to which Irish homeowners exhibit degrees of loss aversion, again we are in the dark. We can assume that they do as every other group and asset does so.
So might this negative equity deter mobility? Again, we simply do not know. Despite the excellent work of the Central Bank on some aspects of the housing market we are in the dark on this issue as on so many others.
From the UK in the 1990s we see very strong evidence that yes, negative equity does deter mobility (forrest and Kennet 1996, Henley 1998).
This ‘lock in’ effect is also found strongly in the USA in Chan (2001), Engelhardt (2003) , Chen and Rosenthal (2008) , Ferreira et al (2010, 2011) , Andersson and Mayock (2012), Modestino and Dennet (2012), Andersson and Mayock (2012) and Sasser and Dennet (2012). These papers suggest that negative equity may reduce mobility propensity by between 25-40%. This is large.
An OECD analysis by Junankar (2011) suggests that this is an issue across all countries. No social science finding is ever unanimous and this is no exception : Coulson and Greico (2012) , Schulhofer-Wohl (2011) and Valetta (2013) suggest that there is limited or no effect. Nonetheless there is a preponderance of evidence for the ‘lock in’ effect in the USA, and the UK.
so : the evidence from the USA and the UK suggests a problem. We can only very cautiously infer but if the evidence maps over to here then we too have a problem. Some solution to negative equity in so far as it deters mobility will have to be a part of the new architecture of the irish economy.
Earlier this week I chanced to listen to an interview on the Pat Kenny show. Pat interviewed the Minister for Social Protection, Joan Burton, about reforms and unemployment etc. We have a major problem with unemployment in this country and so any reform is worth looking at if it can assist in solving this issue.
A few things struck me.
First, there was very little discussion of the role of aggregate demand. The minister did note that lots of the unemployed were such consequent to the collapse of the housing bubble. But the ongoing flatlining of the domestic economy was scarcely mentioned.
Second, and flowing from this, much of the debate was on supply side elements. The minister referred time and again to the german (and austrian) experience. When it was noted that these countries were not suffering recession (low aggregate demand) the response was a confused agreement – yes but they have good labour market supply side policies. To my ears this came across as a thinly disguised eulogising of the Hartz reforms.
the Hartz reforms consisted of two elements : a radical shakeup of the state support services, in effect merging and streamlining job agencies, welfare offices, job centers etc and a significant push to force people to take jobs regardless. The first element is surely uncontentious- streamlining and making it easier for people to find any posts that might exist is a good thing. The second however needs debate. It amounted to a significant cut in the payments to the longterm unemployed and a gradual shortening of the period of unemployment benefit.
the premise of the Hartz reforms was that the basic economic environment was, for Germany, benign. There were, it was argued, jobs there for the longterm unemployed BUT the social welfare rates were such as to discourage people taking these.
So what was the effect? A recent IMF paper summarises the finding of research on the issue. While the reforms improved the lot of the employed, it made the situation of the unemployed worse off. It did reduce the longterm unemployment rate by a small amount. Other research supports this overall finding. Further research suggests that the package of Hartz reforms led to an increased substitution of (especially less skilled) full time work by parttime work. Finally, much of the gain appears to come from increased efficiency in matching – in other words the first part of the reforms, improving communication. Finally, Germany has no minimum wage – the resultant wage moderation and other unique features such as hour banking also matter hugely.
So, if we are going to go down the Hartz lines, lets have an open debate on this. By all means lets see a (labour) minister cut the longterm unemployment payment, in the hope that they will find jobs that are there to be found with the aid of an improved welfare office. But lets not think that this is going to be painless and lets also recall that these reforms worked for Germany in large part by making the domestic economy worker cheaper and more insecure while the economy as a whole powered ahead under an export engine. We need to be very cautious about replicating this in an environment where our exports are….fuzzy.
There is some comment today in the newspapers on an EU commission report which states, inter alia, that welfare rates should be cut in the forthcoming budget. They state in a draft report (which doesn’t seem to be publicly available)
“In part this may reflect the structure of the benefits system in Ireland, whereby activation does not increase with the spell of the unemployment duration nor does unemployment assistance generally decline over time.”
The logic here is that cutting the benefits paid to those in longterm unemployment will induce (aka force) them to work. At one level this is trivial – if we cut unemployment benefit to zero then people would starve, emigrate or work and thus there would be no longterm unemployed. At another level it is problematic as it implicitly assumes that there is a mismatch between a stock of longterm unemployed who are better off on the dole and a stock of jobs that they could take if only they were not better off on the dole. There is a very nuanced EU report on benchmarking unemployment benefits etc here , which suggests that looking at EU Averages is not helpful, and countries that appear very generous or stringent with respect to same actually are generally in line with near and cultural neighbours. Although this report does note the lack of tapering off of UA in Ireland, it also notes that there are offsetting reasons for same.
This is nonsense. The structure of unemployed in Ireland by last occupation is given below. The largest part are craft and related, then personal services then clerical. The first are in large measure the construction related workers who were sucked into the industry at the height of the boom.While these are by no means unskilled, their skills are not those that are needed now or prospectively. The second and third groups are dependent on the domestic economy, when people will go for haircuts and take on office staff.
Unemployment traps tend to be discussed as too much dole. The reality is that since at least 1987 with the work of Tim Callan we have known that there are structural welfare traps. A good overview is given here. Report after report have suggested things such as tapering of benefits (whereby if one goes over a threshold of eligibility for a benefit one does not lose all the benefit immediately but instead the benefit is reduced by a (high) percentage of the amount by which you exceed the threshold) and so forth. These are dull technocratic measures which are unlikely to appease the “on yer bike” brigade but which might well just work… A combination of ensuring that domestic demand is somehow reflated, sensible structured welfare reform (perhaps indeed tapering both benefits and allowances as discussed) and some sensible retraining will result in slow erosion of longterm unemployment. Seeking quickfixes wont.
This is an extended version of an opinion piece published in the Irish Examiner on Saturday 18 May.
The new government jobs initiative is welcome, in so far as it again demonstrates an acknowledgement by them of the seriousness of the employment crisis. Coming less than a year after the last one, we must however wonder if this will be yet another in the seeming never ending series of job initiatives. This one is ambitious: 100,000 jobs will apparently be created within a short time and no less than 200,000 within a short few years, all but solving the employment crisis if we get any hint of growth. And there is an unemployment crisis. 75,000 persons under the age of 25 are on the live register, and all international evidence suggests that the younger and the longer the duration of unemployment a person experiences the greater a negative effect this has on future employability. Of these 75,000 , 27,000 are on the register for more than one year, 2/3 of these being males.
The longterm effects of this experience on this cohort will be very negative, and in my view this is where any jobs initiatives should be targeted first as they are most in need. The standardised rate of unemployment now hovers around 14.5%, and this in the face of renewed emigration. In some parts of the country this crisis is worse than others : with less than 10% of total population the border region has 15% of the live register and a similar percentage of youth unemployment
We have had jobs announced a-plenty in recent years. The may 2011 initiative was short on numbers, but in subsequent disucssions an Taoiseach noted that 100,000 jobs would be ‘a start’. In 2008 the ‘smart green economy’ announced by the then Taoiseach promised ‘thousands’ of jobs in green energy and up to 12,000 jobs in rural areas consequent on a Rural Development Initiative. The Cloud computing initiative in January 2011 had figures in total for up to 20,000 jobs. The proposals here are mainly sensible if sometimes pious. For the most part they are bureaucratic and technocratic in nature, which is in fact a good thing. For the most part, outside direct employment, governments cant really create jobs, but they can create the business, economic and socio-political environment wherein jobs are created. It is difficult to argue with many of the initiatives. Equally it is difficult to see why a government initiative is required to , for example “Identify any sheltered areas of the economy where competition is restricted and commission studies on such areas where appropriate” (1.37) or “Engage with stakeholders on the findings revealed in credit supply and demand surveys with a view to identifying and addressing blockages in the system” (3.35) or “Run a number of business market development ventures, including two significant projects in 2012” (7.4.14). Were all the aspirant actions contained in the document carried through then a start would be made to the transforming of the jobs ecosystem. But then we will have to ask from where the jobs will emerge/
Where are the jobs? A radical transformation of the employment landscape is not easily achieved. The structure of present day employment is therefore a good place to evaluate the ability of jobs to be created. That is not to say that we will not see the emergence of new poles of employment – it is merely to realise that such will start small and take a long time, years or even decades to generate significant employment. At present the structure of employment is heavily weighted to a few sectors.
What is conspicuously missing from the initiative is the largest single driver of employment – economic growth. Growth is noted as the driver, as the engine, as the catalyst, and this is the case. How can we create jobs in an environment where GDP is forecast to grow by anaemic levels . forecasts for GDP range from 0.5% from the central bank, 0.9% the ESRI, 1% the OECD, 1.1% the EU commission, with forecasts racketing lower the more recently they are issued? The bulk of employment , as of q3 2011, nearly 40%, comes from just three sectors. These are manufacturing, trade and health services. Hightech jobs, as defined by Eurostat, account for less than 4% of all employment. Other large sectors include the hospitality sector and education. Thus, any significant growth in jobs will come from these sectors, and they are all dependent on either government spending (constrained) or economic growth in general. There is a weak statistical realtionship btweeen GDP growth and employment growth, weak as there are many many factors involved other than just the measure of GDP, but a simple rule of thumb is that as GDP rises by 1% employment in that quarter rises by 0.1%. Thus sustained and lengthy periods of GDP growth will be required to reduce the overhang. And there is little prospect of such a sustained growth spurt in the next half decade. It is in that context that we need to assess the jobs initiative, and my assessment is that while worthy and useful it is the merest preperation of the ground for a crop yet to be sown.
Brian M Lucey is Professor of Finance at TCD and Managing Director of Ussher Executve Education
Brian M. Lucey 