From the ESRI's Spring Quarterly Economic Commentary

The ESRI (Economic and Social Research Institute) holds a policy conference in Dublin today on the Irish Labour Market in Recession. The Institute says that following a decade of high employment growth and very low rates of unemployment, the Irish labour market is now in crisis. Employment is contracting at a very fast rate: current ESRI estimates are there will be on average 190,000 fewer people in employment in 2009 compared with 2008, and that employment will fall by a further 100,000 over the following year. Correspondingly, unemployment rates are rising at an alarming pace, with the result that the unemployment rate this year is expected to average 13 percent, and in 2010 to rise to over 16 percent. The ESRI says these are challenging figures for policy makers and for society at large.

The five presentations at the conference address aspects of this crisis, drawing on OECD and ESRI research on the Irish labour market. The conference also includes a presentation drawing on the experience of Finland, an economy which, in the 1990s, faced problems on a similar scale to those Ireland now faces. Since we need to try to work out what policy should do to mitigate the damage of the downturn, labour market activation policies form a major part of the discussion at the conference. The five papers are:

Activation Policies in Ireland, by David Grubb, OECD, Paris.

What Works? Applying Lessons from the 1990s, by Philip O’Connell, ESRI.

The Great Depression of Finland 1990-1993: Causes and Consequences, by Jaakko Kiander, Director, Labour Institute for Economic Research, Helsinki.

What Do Migrants Do in a Recession? by Alan Barrett, ESRI.

Profiling the Unemployed in Ireland: Predicting Stayers and Leavers, by Philip O’Connell, Seamus McGuinness and Elish Kelly, ESRI.

Activation Policies in Ireland

David Grubb, OECD, Paris

David Grubb presents the recent OECD report: Activation Policies in Ireland. He notes that Ireland combines high rates of social welfare benefit dependency in the working-age population with relatively high income-replacement rates of benefits. He argues that this combination needs to be accompanied by more intensive activation measures to encourage and assist benefit recipients to secure employment. This may be partly because staffing and funding of the Public Employment Service in Ireland are substantially below levels found in other comparable OECD countries.

The presentation demonstrates that there is a need to have counteracting activitation measures where social welfare benefits have increased, as has happened in Ireland in recent years. Without these measures, the rise in unemployment during a downturn is magnified, and, as the economy recovers, unemployment falls only slowly and long-term unemployment is more persistent.

Grubb argues that Ireland needs to tighten and modernise its benefit administration, which could reduce the number of benefit claims. Contacts between employment counsellors and the unemployed should be more frequent and more active, with individuals being referred to job vacancies and to Active Labour Market Programmes, and subject to sanctions for non-compliance. He also argues that recession should not delay labour market reforms, which should be in place before unemployment peaks and in time to take advantage of the upturn in economic activity when it comes.

What Works? Applying Lessons from the 1990s

Philip O’Connell, ESRI

The presentation looks at how lessons learned from attempts to respond to the high unemployment in the 1990s can be applied to the present crisis. It examines the most recent data available on the emerging unemployment crisis. The current situation differs in a number of important respects from the 1990s. The current budget crisis means that there are fewer resources available to fund Active Labour Market Policies (ALMPs) designed to assist the unemployed to get back to work. The fact that the recession is synchronised internationally means that there are few international destinations to attract would-be Irish emigrants. Moreover, the substantial recent inward migration of recent years means that immigrants represent a significant share of the total number unemployed.

Philip O’Connell argues that the scale of the unemployment crisis and the scarcity of budgetary resources mean that it is essential for policy to respond strategically and coherently. He notes that even when economic recovery begins, unemployment is expected to remain high for a number of years. One element of a strategic response would be to minimise the growth of long-term unemployment, so that when the recovery does arrive, people are prepared and able to take advantage of employment opportunities.

He summarised previous research that shows how individuals with low educational attainment and poor labour market experience are most at risk of unemployment, and of drifting into long-term unemployment. It is essential, therefore, that ALMPs operate effectively and target the most disadvantaged in the labour market. Evidence from the evaluation of ALMPs in the 1990s showed that the most effective education, training and employment programmes were those that were linked closely to demand in the labour market. These are the types of effective programmes that we should invest in the current crisis to prevent the most disadvantaged in the labour market becoming long-term unemployed.

We also learned from the 1990s that prevention is better than cure. The particular difficulties of poorly educated young labour market entrants in finding employment indicates the urgent need to strengthen efforts to reduce early school leaving, as well as to develop effective programmes to enhance the skills of those who have already left school with inadequate labour market skills.

The Great Depression of Finland 1990-1993: Causes and Consequences

Jaakko Kiander, Director, Labour Institute for Economic Research, Helsinki

The Finnish economy of the 1990s shares several common features with the current crisis in Ireland. In Finland in the late 1980s, financial deregulation rapidly increased domestic liquidity, fuelling an investment boom and an asset price bubble as well as full employment and balanced government budgets. The collapse of the Soviet Union and Soviet trade led to a 10% contraction in exports in 1990-91. This coincided with the downturn in the international economy in 1990-93 and an appreciation of the exchange rate that undermined Finnish competitiveness.

Jaakko Kiander’s presentation shows that the deflationary crisis in 1990-93 entailed falling private investment and consumption. The stock market collapsed by 70%, house prices fell by 50% and GDP fell by 13%. Unemployment rose from 3 to 18 percent between 1990 and 1994 and was followed by permanent increases in long-term unemployment and poverty. The crisis also led to a wave of bankruptcies and household debt problems. Public debt increased from 12% of GDP in 1990 to 60% in 1995 and the cumulative credit losses of Finnish banks amounted to 15 percent of GDP.

In response to the crisis, fiscal policy was tightened in 1992-95: public-sector expenditure and employment were cut, social benefits were frozen or reduced, and taxes on employment were increased. But in spite of these measures there were large government deficits in 1992-1994, and the cutbacks and increased taxes further reduced demand and employment.

The crisis eased after the abandonment of fixed exchange rate policy. The Finnish markka depreciated initially by 40%. This, combined with a shakeout of unproductive businesses, led to dramatic improvements in competitiveness. The banking crisis was resolved by a combination of nationalisation, state recapitalization, restructuring and massive layoffs of bank staff. Economic growth picked up from 2004, unemployment fell from 18% in 1994 to 10% in 2000 and to 6% in 2008, although it has not fallen to its pre-crisis levels.

Kiander notes that the Finnish crisis was solved by currency devaluation. For countries within the Eurozone, deflation appears to be the only viable alternative, but the adjustment process is slow and painful.

What Do Migrants Do in a Recession?

Alan Barrett, ESRI

Huge numbers of immigrants came to Ireland during the boom years. This was especially the case after the EU expanded in May 2004. In the first quarter of 2008, the CSO reported that there were 352,000 non-Irish nationals employed in Ireland, or 16.5% of total employment. The corresponding figure for the third quarter of 2004 was 146,800, or 7.8% of total employment.

Alan Barrett argues that we know from earlier research on immigrants in Ireland that they had significantly lower earnings than native employees. They also had lower levels of occupational attainment. Such findings suggested that immigrants might be more susceptible to job losses in recessionary times. Drawing on the CSO’s Quarterly National Household Survey, Barrett shows how the annual rate of job losses among immigrants exceeded that of natives towards the end of 2008 – 3.8% for native employees compared with 5.3% for immigrants.

The weakening labour market appears to have resulted in a net outflow of immigrants in 2008. However, the rate of net outflow was less than half the rate of employment loss among immigrants in 2008. Hence, it appears that immigrants are initially choosing to remain in Ireland when they suffer employment losses. The rate of unemployment generally rose faster among immigrants than among natives in 2008, especially among nationals from the Eastern European accession states. Data from the Live Register for the first part of 2009 suggest that this trend may have accelerated in 2009.

Looking ahead, Barrett speculates on whether immigrants will be more likely to out-migrate as the recession continues. The crucial variable to be considered is economic conditions elsewhere. Given the globalised nature of the current recession, outflows are less likely than would otherwise have been the case, at least in the short-term.

Barrett also speculates on how Irish attitudes to immigrants might change as the recession continues. The international experience suggests that immigration is viewed most positively when immigrants are seen as meeting the needs of the labour market. As a result, a rising stock of unemployed immigrants might lead to a less favourable attitude towards immigrants on the part of Irish people.

Profiling the Unemployed in Ireland: Predicting Stayers and Leavers

Philip O’Connell, Seamus McGuinness and Elish Kelly, ESRI

Profiling is a formal method for the early identification of individuals with a high risk of long-term unemployment. Profiling thus provides a systematic basis for referral of unemployed clients with a high risk of entering long term unemployment to appropriate interventions.

This presentation reports the results of a major profiling project carried out by the ESRI in partnership with the Department of Social and Family Affairs (DSFA). In September 2006, and for the following 3 months, all new claimants for unemployment-related benefits on the Live Register were issued with a questionnaire designed to collect a range of factors that are expected to influence subsequent employment prospects. This resulted in a national sample of approximately 50,000 unemployed claimants whose social welfare and labour market outcomes were tracked by the DSFA over the next 18 months.

The data provide the basis for a pilot national profiling system that can identify unemployed clients most likely to experience employment difficulties and to enter long-term unemployment. The profiling model has strong predictive power allowing us to identify at-risk individuals with a very high degree of accuracy. Among the most important factors affecting the risk of long-term unemployment are: low educational attainment, a history of previous long-term unemployment, low labour market attachment, previous participation in a Community Employment scheme, literacy or numeracy problems, and older age.

The profiling system can be used to provide a rigorous basis for targeting active labour market policies to those most in need of such interventions and thus to enhance the effectiveness and efficiency of activation measures in favour of the unemployed. The success of profiling crucially depends on its being combined with referral of high risk individuals to targeted activation programmes, including training and employment schemes, that effectively enhance the employment prospects of their participants.