Why does Ireland have an employment crisis and what can we learn from history?

Outlining the present employment crisis

This weeks publication of the final quarterly household survey for 2010 illustrates the gravity of Ireland’s employment crisis. Since December 2009, 64,500 full time jobs have been lost. This has decreased total employment to 1,823,200. Most of these, approx 20 percent are attributable to a decline in construction activity. Total employment in the construction sector has declined from 269,000 in 2007 to 109,900. Employment in this sector has decreased by 60 percent in less than 3 years.

The total number in the labour force is 2,122,200, a decrease of 33,000 from December 2009. That 33,000 figure is probably reflective of the number of people emigrating each year. The percentage of those unemployed in the workforce has increased to 14.7 percent. Of this figure, most are now long term unemployed. The long term unemployment rate is now 7.3 percent. For the first time since 1998, the overall employment rate (the percentage of the labour force with jobs) has decreased to 59.4 percent.

To put this in context, in the Netherlands it is currently 76.5 percent. For the first time since 1993, the male employment rate has decreased to 63.1 percent. Interestingly, part time employment now accounts for 23.2 percent of total employment. Male part time employment has increased to 120,000 whilst female part-time employment to 303,000. This full-time/part-time dynamic is likely to become central to the Irish labour market over the coming years.

It is the decline in full time employment that constitutes the increase in the level of unemployment. Of the 14 different sectors used in the CSO labour market studies, 10 have experienced a decline in employment. But, construction continues to account for over 40 percent of this decline. The industry and retail sectors accounts for most of the remainder. This helps explain why the male unemployment rate is currently 17.3 percent whilst the female unemployment rate is 10.1 percent. All of these measures, and the annual percentage increase, illustrate that Irelands employment crisis is getting worse not better.

Furthermore, it is gradually reversing the jobs miracle that occurred in the Irish economy from 1995-2005. What we can learn from the past 40 years is that Ireland appears to go through cyclical employment crisis and rarely if ever are lessons learnt from the past. It can crudely be summarized as follows; in the 1970s a boom occurred in the domestic economy and this facilitated high levels of employment. In the 1980s a contraction in the domestic economy led to an employment crisis. In the 1990s employment improved in the export and internationally services sector but unemployment rates remained persistently high. In the 2000s a construction boom occurred in the domestic economy and facilitated full employment. In 2008-2010 a contraction (or statistically speaking, a depression) occurred in the domestic economy and led to an employment crisis. Furthermore, the export economy has remained relatively stable throughout the boom-bust period. In the mid to late 1980s the export economy, similar to today, was relatively immune from the crisis. When it increased in the mid 1990,s growth improved but not employment.

Thus, it is only when the domestic economy is growing does Ireland experience full employment. If this is the case then all policies focused on export led growth and international trade, whilst important, will not tackle the jobs crisis. It is time to look to indigenous enterprise and an expansion of the domestic economy to solve our problems. Increased economic openness (globalisation) brings significant economic gain but unless the domestic economy, its citizens and workers, are provided with the security against global downturns then the cost of globalisation outweigh the gains.

Learning the lessons from employment trends over time

Ireland experienced a massive jobs crisis from 1980-1995. Yet, few if any lessons have been learned from this period. In 1988 there were 1.1 million people at work, today it is 1.8 million. In 1988 the total labour force was 1.32 million, today it is 2.1 million. There were approx 241,000 people unemployed, today there are 299,000. Unemployment as a percentage of the labour force was 18.4 percent, today it is 14.7 percent.

Tackling the jobs crisis was central to the early ‘national social-pact agreements’ between government, trade unions and IBEC. The 1991 ‘programme for economic and social progress (PESP)’ and the 1994 ‘programme for competitiveness and work (PCW)’ both prioritised employment creation as the primary objective of national public policy. The problems in the early 1990s and today are not hugely dissimilar. There was a decline in economic growth, investment and employment, particularly in the domestic economy.  The policy response was wage moderation to increase the competitiveness of our export and active labour market policies aimed at tackling long term unemployment.

But, the problem of employment was not solved until a boom in the domestic economy after 2000. In this regard, I want to argue that there is a deep seated structural problem in Ireland’s labour market and it is quite simple – there are simply not enough of us. There are simply not enough of us in the domestic economy to develop sustainable levels of economic growth and employment creation. This is also the source of our public finance crisis. There are simply not enough taxpayers to plug the gap between revenue and expenditure.

The most important lesson from the 87-90 period of adjustment is that improving the fiscal deficit and reducing the debt-GNP ratio do not improve unemployment rates. Unemployment rates only improve when there is growth in the domestic economy. Thus, whilst the employment rate (percentage increase in employment per annum) improved dramatically from 1996 -2000, it was only after 2000, with a construction and consumption boom did unemployment rates begin to fall. From 2000-2007. Ireland maintained full employment. Unemployment averaged at just under 4 percent.  Since 2008 it has jumped to 14.7 percent. The reason for this increase is directly attributable to a contraction in the domestic economy, particularly construction and retails. No amount of export led growth will solve this problem. Employment in the internationally traded exports will increase at minimal rates. Manufacturing employment has been on a steady decline since 2000 and this will continue. In net terms,  employment in internationally traded services has been increasing. Most of this has occured in the finance sector i.e. the IFSC.

Service based employment accounts for approx 68 percent of total employment across Europe. Industry accounts for 25 percent and the remainder in agriculture. But, ‘services’ includes everything from health, education, finance and retail. In Ireland, the health sector alone employs approx 300,000 people or 15 percent of the workforce (this is equal to those employed in IDA and Enterprise Ireland companies).  Ireland will not increase public service employment, not least because of the strain on public finances. So it will have to come from private service employment or a renewal of construction activity.

To put it in context, the private service (export) sector increased employment by 22 percent from 2000-2009. In real terms, 77,000 people were employed in 2000 and 95, 271 in 2009. This is hardly the sector that will solve the unemployment crisis given the number and skill set of those unemployed. Thus, the only way full employment will occur is either a) through a rapid expansion and growth in the domestic economy or b) a miracle in the export economy.

Economists and policy makers do not like this reality because the ‘sheltered sectors’  are assumed to squeeze out the export, internationally traded services sector. There is some truth in this. But, it does not take away from the reality that it is the domestic economy that sustains full employment not the FDI sectors.

Tackling the future requires employment protection not low taxes

Given the deep structural fragility of the Irish labour market a new policy paradigm must be established for the future if we are to avoid a generation of emigration. I would argue that the lesson from Europe is that employment protection is more important that labour market ‘activation’. Keeping people in employment through a variety of innovative policies as adopted across Europe benefits employers, workers and government. Unfortunately, to date, employers have only considered their particular interests rather than the interest of the economy as a whole. If one employer says ‘I am reducing staff numbers by 2 percent to save costs’ in a context where the economy is growing and the employment rate increasing then it will have little net impact.

However, if all employers do the same in a context where the government is deflating the economy then the net impact is hugely damaging. The government ultimately picks up the bill through social welfare payments, which in turn puts pressure on the fiscal deficit, i.e. more cuts, more deflation and more job losses. It is not a sustainable path and it has to stop. The best way to plug the dam is through the protection of jobs. This is what the government, similar to their European counterparts should have been doing since 2008.

The reason why most European countries adopt collective bargaining responses to avoid job losses is because of the institutional-legal guarantees that provide labour with more equal bargaining power in its relation to capital. It is not likely that FG/Lab will provide such institutional guarantees. In fact, their policy response to date has been to reduce taxes on labour. In a context where tax not expenditure is the core problem in our public finances FG/Lab continue with a repetitive, unsustainable strategy of low taxes. This is despite the fact that it is cheaper to employ labour in Ireland that most European countries. In 2007, according to Eurostat data, Ireland was the cheapest place (after Cyprus), in the EU27 for employers to employ those on low earnings. Despite this, the policy response to tackle employment by both the previous and present government has been to cut social insurance costs for employers. This is simply exacerbating the problem as it continues to focus on cost rather than innovation, productivity or working hours as the primary means to increase the employment rate!

Institutional guarantees to protect labour across Europe were designed to provide security against market risk. It was a political response to the vagaries of boom-bust capitalist cycles. The alternative to not being provided these political-legislative guarantees is for organised labour to wield ‘negative power’ through strike action.

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One response to “Why does Ireland have an employment crisis and what can we learn from history?

  1. Pingback: What evidence, if any, would convince you that austerity hasn't worked? - Page 10

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