The Political Economy of Labour Markets in Recession……..

The primary challenge facing Ireland’s economy at the moment is tackling unemployment. The question of how to do this is the challenge of labour market policy. Ireland has gone from a position of labour shortage to labour contraction in less than 12 months. The activation policies during the asset price bubble were primarily related to getting ‘inactive’ people into work. The design of these activation measures have come in for criticism by the OECD in a recent report ‘activation policies in Ireland’ and presented by David Grubb at the ESRI policy conference yesterday; ‘the labour market in recession’. The central criticism of Ireland’s labour market policy is that unemployment benefits went up without counter-activation measures. Ireland’s ‘moderate benefits’ were not linked to policies that required the unemployed to actively seek work, or engage in tailored training programmes that are linked to skill specific labour markets.

To a certain extent this is a less benign criticism that the NESC has made of Ireland’s approach to labour markets. Both share a criticism of the design of Ireland’s ‘active labour market policies’ as being administratively ambiguous (lacking centralisation) and lacking counter-activation measures. Thus, both concentrate heavily upon ‘supply-side’ policies. The activation measures outlined by NESC in the Developmental Welfare State are focused upon helping jobless people to participate in the open labour market and stemming educational disadvantage. The activation measures outlined by the OECD are primarily focused upon ‘forcing people to get a job’ (it is this irresponsible use of language that leads to newspaper headlines such as ‘top expert says dole is too generous’), ‘tighten and modernise benefits administration’ and ‘require lone parents to be available for work’.

However, surely this emphasis upon active supply-side measures is the wrong policy option in times of economic recession? Surely, the emphasis should be upon demand? It was this lack of emphasis upon stimulating and creating demand for employment that struck me at the ESRI conference yesterday. The OECD report is based upon evidence leading up to 2006. But, as we all know, Ireland’s economic crisis has turned into a job crisis, which cannot be solved by getting inactive workers into active jobs that do not exist? The ESRI predict that Ireland’s unemployment rate will rise to 16.8 percent by the end of next year. In this regard, the capacity of the government to deal with activation is extremely limited, and arguably the focus should shift to facilitating and creating public & private demand for labour.

Jaako Kiander (director of the labour institute for economic research in Helsinki) presented a worrying comparison of Irelands economic crisis (recession) to the Finish depression in 1990. The causes of both crises are remarkably similar; financial deregulation led to an explosion in the availability of cheap credit. This cheap credit (facilitated by pro-cyclical economic policies by government, i.e. cutting taxes) led to an investment and asset price (housing-construction) bubble. Private sector debt doubled in 4 years. In order to avoid a devaluation of the currency a deflationary adjustment was chosen; the government tried to depress demand by cutting wages. The governments attempt to balance its budget by higher taxes and cutting expenditure backfired. Aggregate consumer demand (by individuals and firms) collapsed. 450,000 jobs were lost which equated to 20 per cent of the population. It took 15 years (2007) for employment to get back to 1991 levels. This fact alone should be enough for the government to recognise job creation as the primary policy objective over the next 5 years.

Another worrying fact from the Finish crisis was are causal factors behind its recovery. The Finish economy only recovered when exports (i.e. Nokia) became ‘competitive’. This only occurred when the government devalued the currency, and this required moving away from a dogmatic reliance upon a fixed exchange rate. However,  devaluation is not an option for Ireland, which further limits our fiscal policy response.  The high interests rates in Finland were also seen as a primary reason for the long recovery process in Finland. But, thankfully, this will not be an issue in Ireland, with the European Central Bank cutting interest rates far below that of the Finish Central Bank.

Thus, if the Finish experience is anything to go by, then Ireland is facing a serious jobs crisis that could potentially last for 15 years. Active labour market policies that focus upon supply and demand have to be center stage in public policy. The latest statistics from the live register show that the composition of those unemployed, as a percentage, is as follows;

  • Construction                                 38.0
  • General operatives                     14.4
  • Retail/ Sales                                  10.9
  • Office/admin/clerical                 9.3
  • Domestic/catering                       8.5
  • Management                                     4.5
  • Vehicle trade                                  3.4
  • Unknown                                          2.9
  • Other (perhaps professional)  8.0

The composition of the unemployed has a somewhat higher education profile (skilled workers- electricians etc) in comparison to the 1980’s. But, those with low education are still those most at risk. Furthermore, research by Alan Barrett has shown that the rate of unemployment amongst ‘non-nationals’ is rising at a much higher rate relative to Irish-native. This is another policy challenge facing government. This, coupled with the vastly changed situation in the economy may impact upon attitudes to immigrants and this should be cause for concern.

Thus, the overall challenge facing the Irish economy is lifting the labour market out of recession.  The policy challenge outlined by ESRI researchers such as Philip O’Connell focus upon specific skills training and employment subsidies for employers. The most effective education, training and employment programmes, it is convincingly argued, are those linked to labour market demand. But, if there is no demand, then the active supply policies are futile. Hence, the focus should surely be upon creating demand for work? In order to do this, the government needs to stop viewing a dying labour market as the responsibility of the private sector.It requires conceptualising the role of the state in the labour market.

Markets are social constructs, and in order to stop the labour market going into absolute free fall the government needs, as an absolute priority, to activate demand through the creation and facilitation of jobs. Active labour market policies aimed at supply must be coupled with active labour market policies aimed at demand.  This does not have to be the creation of public-sector work but subsidising private firms to create demand for construction skills through advancing school building programmes, roads and a whole host of other labour intensive activity. Simultaneous to this, government needs to prepare for structural shift away from construction (1 in 5 males worked in construction in 2006). This requires practical policy measures aimed at export led growth. To do this requires thinking outside the box, and developing creative, innovative fiscal policies. We are constantly being told of the need for the private sector to innovate. But now is a time for the state, and the public sector to innovate.  Appeasing international investors is important but job creation should be the strategic objective of labour market policy.

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