Remembrance of things past

The title of Colm McCarthy’s Post Goodbye to All That is Robert Graves’ account of his experiences in the Great War. This evoked in me some nostalgie de la boue so I had a look at a graph of Ireland’s unemployment rate.


Looking at the early years in the graph, it seemed that the surge in unemployment in the first half of the 1980s got built into the structure of the economy. Indeed, an influential comparative study of unemployment in OECD countries estimated that the Irish equilibrium or “natural” unemployment rate had risen from 9 per cent over the period 1969-79 to 13.1 per cent between 1980 and 1988 (Layard, Nickell, and Jackman, Unemployment: Macroeconomic Performance and the Labour Market, Oxford University Press. 1991). As if to vindicate this claim, after a faltering improvement in the early 1990s, the unemployment rate was headed for 16% in 1994, some five years after growth had resumed.

There was, of course, a lot of debate about how genuine the unemployment – especially the Live Register (LR) – figures were. In 1996 the CSO undertook a special inquiry that showed less than half of those registered as unemployed were unemployed in the ILO (Labour Force Survey) sense of the term. As a result after September 1998 all those who have been unemployed for six months were called for interview to assess whether they suitable for an existing vacancy or in need of training. To cite the OECD, “nearly half either failed to attend the interview or refused intervention, and 28 per cent were struck off the rolls . . .”. This helped close the very large gap that had emerged between LR unemployment and unemployment as measured in the Labour Force Survey. However, it would not affect the ILO estimates shown in the Graph and its timing does not coincide closely with the rapid fall in unemployment that began in 1994.

Once it started, the decline in unemployment was spectacular. By 1999 the rate had fallen to 4% and it remained close to this level for the next six years. At the same time our emigration was reversed and large-scale immigration became a feature of our economy. Behind all of this was a rate of employment growth that has few parallels in any country.

I hope Colm will permit some nostalgia for these years.

It would be nice to be able to draw lessons from this period that would serve us now that we are experiencing such an extraordinary reversal of fortunes on the labour market front. I tried to do so in a chapter over-optimistically entitled “When Unemployment Disappears: Ireland in the 1990s” [Chapter 8 in Martin Werding, (ed.), Structural Unemployment in Western Europe: Reasons and Remedies, MIT Press, 2006]. My conclusion at the time was that “The exceptional performance of the Irish labour market during the 1990s was not triggered by radical structural reforms”. This despite the fact the a new emphasis on active labour market policies did make some contribution. Note that these policies have not averted the unprecedented rise in unemployment over the last two years.

A Keynesian story does better as an explanation – increases in aggregate demand fuelled by global growth, inward FDI, competiveness etc.

These conclusions point to a gloomy prognosis for our unemployment rate as the macroeconomic conditions of the late 1990s are unlikely to reappear for some time.

14 replies on “Remembrance of things past”

Interesting – speaking of the Great War, as part of my thesis, I had to come up with some ballpark estimates of unemployment in the 1920s and 1930s for Ireland among other countries… will check back on that and see what Kevin and I concluded.

One other comment – would the Washington Consensus crowd be happy with your description of Ireland’s harnessing of global growth and FDI as a Keynesian story? Perhaps it’s been the atmosphere here these last 15 years or so, but that strikes me as an interesting description of events. Or perhaps this is just a neutral reference to the AD = C + I + G + NX model?

Brendan, you do us all a service in pointing out the likely long-lasting effects on unemployment of this recession. As I’m sure you are painfully aware from your own work with these data, it is difficult to estimate reliable models of equilibrium unemployment from the cross-national data. For my money, the most convincing attempt is the work of Olivier Blanchard and Justin Wolfers in the Economic Journal (JSTOR and NBER WP links below). The central idea is that macroeconomic shocks interact with labour market policies/institutions to produce potentially long-lasting impacts on unemployment. I think this is consistent with your review of the Irish case. The timely policy lesson is that it is important to minimise both the initial adverse shock and to promote flexible labour market policies.

Published version:

NBER Working Paper version:

There are a number of major differences between the situation in Ireland today and that in the early to mid 1980s. In the early to mid 1980s, the employment rate in Ireland was by far the lowest in the EU15. Back then, only about 35% of the population aged 15+ in Ireland were in full-time equivalent employment. In 2007 Q4, on the eve of the global recession, the figure was approximately 55% and the full-time equivalent employment rate in Ireland was almost the highest in the EU15 and way above the EU15 average. These are the figures:

percentage of population aged 15+ in employment in 2007 Q4:

adjusted for percentage in part-time employment:

[ 1] Denmark 55.6%
[ 2] IRELAND 55.5% <<<<
[ 3] Portugal 54.3%
[ 4] Finland 52.4%
[ 5] Sweden 52.1%
[ 6] U. Kingdom 52.1%
[ 7] Austria 51.6%
[ 8] Spain 50.3%
[ 9] Neth’lands 49.1%
[10] Luxembourg 49.0%
[11] Germany 48.0%
[12] France 47.9%
[13] Greece 47.7%
[14] Belgium 44.7%
[15] Italy 42.8%

source: computed from figures in Eurostat online database

Even allowing for a large fall in employment in Ireland and smaller falls elsewhere in the EU15 in the course of the global recession, the full-time equivalent employment rate in Ireland is likely to remain above the EU average at the end of the global recession. One of the reasons why many EU countries have relatively low unemployment rates, despite having very low employment rates, is that, having had serious unemployment continuously since the 1970s, they have perfected techniques for keeping people out of the official unemployment figures. Chief among these are (a) allowing large numbers of persons to go on Invalidity Benefit rather than Unemployment Benefit (b) encouraging people to retire from the workforce while still relatively young, as shown by the following figures:

average exit age from labour force in 2006:

[ 1] IRELAND 64.1 <<<<
[ 2] Sweden 63.9
[ 3] U. Kingdom 63.2
[ 4] Portugal 63.1
[ 5] Finland 62.4
[ 6] Neth’lands 62.1
[ 7] Spain 62.0
[ 8] Denmark 61.9
[ 9] Germany 61.9
[10] Greece 61.1
[11] Austria 61.0
[12] Belgium 60.6
[13] Italy 60.2
[14] Luxembourg 59.4
[15] France 58.9

With regard to the economy, apart from the major difference of Ireland’s GNP per capita (PPS) being 65% of the EU15 average in the early to mid 1980s and 115% of the EU15 average in 2007, the situation re the Balance-of-Payments is totally different today to what it was in the early to mid 1980s. At the beginning of the 1980s, there was not only a global recession but, in addition, a disastrous Balance-of-Payments deficit in Ireland which reached 13.7% of GDP in 1982. The result was that domestic demand, which is the main determinant of employment growth, had to be constrained in Ireland for years and years, despite good growth in the global economy and good growth in Irish exports from about 1983 on. That B-of-P deficit was more or less eliminated only around 1987/88. Once that happened, domestic demand was able to grow again and employment rose sharply and unemployment fell. Similarily, when the next global recession occurred in 1991/92, Ireland came out of it with only a very small Balance-ofPayments deficit. As a result, as soon as that global recession ended, domestic demand in Ireland was able to grow again and, as after 1987/88, employment rose sharply and unemployment fell. The actual Balance-of-Payments surplus/deficit figures are as follows:

1980 deficit of 10.9%
1981 deficit of 13.7%
1982 deficit of 9.9%
1983 deficit of 6.7%
1984 deficit of 6.0%
1985 deficit of 4.5%
1986 deficit of 3.4%
1987 deficit of 0.4%
1988 deficit of 0.3%
1989 deficit of 1.9%
1990 deficit of 1.8%
1991 deficit of 0.4%
1992 surplus of 0.4%
1993 surplus of 3.7%
1994 surplus of 2.9%
1995 surplus of 2.8%
1996 surplus of 3.3%
1997 surplus of 3.1%
1998 surplus of 0.8%
1999 surplus of 0.2%
2000 deficit of 0.4%
2001 deficit of 0.6%
2002 deficit of 1.0%
2003 deficit of 0.0%
2004 deficit of 0.6%
2005 deficit of 3.5%
2006 deficit of 3.6%
2007 deficit of 5.4%
2008 deficit of 4.5%
2009 deficit of 0.0% (conservative forecast)

As the figures show, the B-of-P deficit is forecast to be virtually zero in 2009 (many economists actually forecast a large surplus in 2009). Hence, the situation today is more analogous to what pertained both in 1987/88 and later in 1991/92, rather than what pertained in 1981/82. Both in 1987/88 and 1991/92, because of the absence of any B-of-P constraint, domestic demand was able to grow in parallel to the growth in the world economy and, as a consequence, employment rose and in both periods unemployment fell sharply.

Given the absence of any Balance-of-Payments constraint today, the key requirement for getting unemployment down again is that, as soon as the current global recession ends, which there are increasing signs is going to happen later this year, domestic demand must be enabled to grow in parallel to the growth in the world economy, just as happened post 1987/88 and post 1991/92 (but which, for the reasons stated could not be allowed to happen post 1981/82). We should not be browbeaten into unnecessarily constraining domestic demand just for the purpose of achieving a large Balance-of-Payments surplus in the next few years. If domestic demand is allowed to grow in parallel to the growth in the world economy, as that world economy comes out of recession in the next few years, then the experience of the post 1987/88 and post 1991/92 periods indicate that Ireland’s unemployment rate will fall sharply. Its not rocket science.

It may not not be rocket science but the speed of recovery is unlikely to replicate what followed in other postwar recessions.

This recession will influence policy and business decisions for many years to come.

Governments are wallowing in red ink and for Ireland, what happens in the US and UK will have a big bearing.

Recent movements in the oil price signal that even with a tepid recovery, central bankers will begin to get jittery about inflation again. So borrowing costs will rise in coming years.

As for FDI, most of the recent projects have been investments from existing firms, while there has been a decline in Irish greenfield investments, coincident with rises in Eastern Europe.

Given the current anti-business sentiment in the US, there is also likely to be a reluctance for firms to move jobs overseas on a big scale, in the next few years.

Recently, student loans lender Sallie Mae announced that it would return 2,000 outsourced jobs from India and the Philippines. It was an attempt to influence Obama’s plans on federal assisted loans. The Sallie Mae move didn’t work, but it reflects the prevailing mood.

An interesting development during the boom, was the demand for people in their 40’s and 50’s who were viewed as more reliable compared with younger workers who changed jobs at a rapid rate.

The trend of older people losing jobs and being left on the scrapheap, will inevitably return.

The 2006 Census at the height of the boom, showed that Ballina, County Mayo had the highest unemployment rate among large Irish towns, with 15.8% of its labour force out of work. Tralee (14.2%) and Dundalk (13.9%) also had high unemployment at the time of the 2006 census while at the other end of the scale Malahide (4.3%) and Leixlip (4.4%) had the lowest rates.

The unemployment rate was calculated using the responses to the question on Principal Economic Status in the 2006 Census. The national rate was 8.5%, with urban areas (9.5%) having higher unemployment than rural areas (6.9%).

The official unemployment rate fell to 4.2% in late 2006.

With a population of 3 million, the jobless level was 65,000 in 1973. In 1977, in the aftermath of the dislocation of the quadrupling of oil prices in late 1973, FF leader Jack Lynch was able to say that a government with over 100,000 unemployed in the succeeding election, wouldn’t deserve to be elected.

If memory serves me right there was a SSISI paper back in the 80’s on hysteresis in Irish unemployment by a Mr George Lee. I thought it was quite good at the time & notwithstanding the rather critical comments he got.

W.r.t unemployment : preventing people entering long term unemployment is key. This depends on a combination of Passive Labour Market Policies (the operation of the benefit system largely) and Active LMP’s. The soft target is replacement rates but its unclear that one gets much traction from lowering these & remember there is huge variation in RR’s so the average can be quite misleading. The duration of these (how long one is entitled to UB) matters. It also seems to matter how vigorously the system is applied: calling them in after 6 months & checking that job search is going on etc.
And you need to combine all this with ALMP’s, carrots as well as sticks.
A great deal was learned about unemployment in the 1980s and although the circumstances are not identical ( they never are) it would be worth revisiting this literature.
It seems to me that this would be a more useful step than the now rather tiresome debate about bank nationalisation.

“A Keynesian story does better as an explanation – increases in aggregate demand fuelled by global growth, inward FDI, competiveness etc.”

As Brian Lucey has pointed out, in a post on another thread, the only Keynesian shot that this Government can find in its locker is that President Obama’s fiscal stimulus will work. John’s post (above) provides the context. Surely it’s time to craft our own Keynesian story to boost domestic demand while multipliers are in excess of unity and leakages are limited.

We have an appropriate independent regulatory model in key infrastructure and utlility sectors which, if applied properly (rather than perversely – as it currently is), would attract and retain the necessary private sector finance to boost activity, productivity and competitiveness. The State is going to be tied into de facto ownership of the banking system for some time. In the context of the “Great Deleveraging”, succinctly described by Colm McCarthy, the State, consequently, needs to withdraw from ownership of infrastructure and utility activities and apply the proceeds to replenish the NPRF and to finance properly evaluated investments in sectors where the regulatory revenue model is difficult, or impossible, to apply.

As Andrew McDowell (the author of Fine Gael’s Rebuilding Ireland policy document) has pointed out in another thread, politics and industrial relations present obstacles that have to be overcome, but the economic rationale should be crystal clear.

George Lee can be found here
“Conventional Keynesian or Classical macroeconomic theories must be considered inadequate to explain unemployment experiences such as the Irish one. Rigidities that one might associate with fixed contracts, or even adjustment costs in relation to prices or quantities, can hardly account for 17 years of rising unemployment. Indeed, surely such an upturn in conjunction with the apparent breakdown of the unemployment-inflation relationship serves to challenge the existence in Ireland of a stable “natural” rate of unemployment towards which the economy would gravitate and at which the level of inflation would remain constant. Within this context it is compelling to consider the existence of hysteresis in the labour market – i.e. the possibility that an increase in umemployment could have a direct impact on the natural rate or, to put it another way, that this year’s equilibrium unemployment depends upon last year’s actual rate. This paper examines the presence of hysteresis in the Irish labour market and in so doing enables estimates for the Irish natural rate of unemployment to be calculated. In all cases the long-term equilibrium rate of unemployment is considered to be the same as the natural rate. In Section 2 competing explanations for the hysteresis phenomenon, specifically physical capital, human capital and insider (union members)-outsider (non-union members) explanations are discussed. The following section briefly considers some econometric issues which may arise in the presence of hysteresis while Section 4 is concerned with some discrete time dynamics associated with the natural rate of unemployment. In Section 5 a procedure for testing for hysteresis is derived from the analysis in the preceding two sections. The paper then goes on to apply this test to Irish data and discusses the implications of the results. Since no such work has been done in an international context, it was not possible to compare the Irish outcome with that for other economies. In so far as possible mathematical considerations are dealt with in the appendices.”

time to revisit this?

@John: Yes, the Irish experience over the period 1998-2006 was all the more exceptional in that labour force participation rates rose, and not only among married women. We did not resort as much as many continental countries to encouraging withdrawal from the labour force as a way of solving the unemployment crisis. Nor did we encourage large-scale part-time working, á la hollandaise, to spread the available work around. Unemployment rates fell, and employment rates rose, among most demographic groups and at most educational levels. The rise in the employment/population ratio made a significant contribution to the rise in living standards. There was also a marked narrowing of regional unemployment differentials. (I summarized these developments in a paper to SSISI May 2004 – I hope that we are saying “goodbye to all that” as the present crisis persists.
Kevin Denny is right: The real challenge for our labour market policies now will be to prevent the recent surge in new unemployment from transiting to long-term unemployment, with all the negative implications that would have for the “natural” rate. The indicators are not good: the number of males of all ages who had been continuously registered as unemployed for one year or more increased by 23% between October 2007 and October 2008, and the number of males aged 20-24 in this category rose by 33%.

Jaysus, I’m not economist but the graph’s unemployment profile has to correlate closely with the beginning of the building boom in the late 1990’s and follows the prolonged building binge until it finally ends with the property bubble collapse.

Forget about all the macro-economic fulminations. Only one macro-economic factor mattered – Cheap Money. Whilst many property prices had double or tripled from the late 90’s into the early period of the 2000-2001, our entry into the Euro, and the attendant cheap interest rates coupled with disastorous risk assesment by lenders, kept employment levels at unsustainable levels for years. Had the property bubble been checked our unemployment levels wouldn’t have been 4%.

I’m far too polite to mention govt policy although I distinctly remember Harney’s declarations during 2000 that immigration would skyrocket. Did the govt know that an era of cheap money was about to be unleashed on the Irish economy, and for once an Irish govt was well prepared for this eventuality? (No escape plan on the back end unfortunately.)

@ tomas MacAmloaibh
Spot on! It was then that they should have realized that fiscal policy needed to be tighter, given all the cheap money and lack of CB control. But our politicians could see that re-election was more important and getting the voters drunk on inflation of money supply was essential… them. And FG seem to be trying to buy votes also. The only way out is a national government, with honest people participating. The good thing about a depression is that the sooner that people sober up, the sooner they get things working, but at a newer level. It takes years, see Iceland.

I see Bob Chapman is suggesting that the Obama tax haven attack is a negotiation with USA corporations on other issues and may not be as biting as feared.

@tomás, not arguing with the main thrust of your point, but most of the fall in unemployment predated the construction boom. It can more plausibly be attributed to the direct and indirect employment effects of rapid growth in exporting industries, which lasted up to around 2001. The end of this period of growth overlapped with the start of the construction boom, which I date to around 1998, when construction employment breached 8% of total employment.

Rightly, Brendan has emphasised the Keynesian story (with a supplement of emigration) in understanding the rapid fall in unemployment from the mid-1990s to 2000 and the unlikely repeat of those conditions for sometime, if ever, in the near future. What he will also remember in researching the lost times of rapidly falling unemployment and trying to identify the lessons to respond to the present crisis is that the composition of the unemployed then was very different from what it is now. Then we had a relatively homogeneous group – poorly educated and low to semi-skilled men, often living in public accommodation – particularly among the long-term unemployed. It was towards this group that many specific labour market policies were directed (e.g., Social Employment Scheme now Community Employment) and policy initiatives such as the establishment of the area-based partnership companies were taken.

Now unemployment is different. However, before commenting on the composition of the unemployed it should be noted that right through the boom years one group of social welfare recipients increased yoy. Recipients of disability related payments increased from just over 153,000 in 2000 to a current estimate of 230,000. As a proportion of the labour force, recipients of disability related payments increased from 8.6% of the labour force in 2000 to an estimated 10.3% in 2008. Many of these are long-term recipients. The reason I present these figures is that the path to receipt of a disability and also to a carer’s related payment was often eased as a result of being considered “hard to place” or “not progression ready” by the national employment service (FÁS / DSFA) in the context of the Employment Action Plan Process (EAP). Conclusion, there is a large amount of hidden unemployment in the disability stats and many of these recipients are more similar in profile to the long-term unemployed of the 1990s. This shows through in the current composition of the unemployed.

Turning the composition of the unemployed now as compared to them. While accurate figures are not yet available, data from the DSFA suggest that over 40% of persons currently unemployed have at least a post Leaving Certificate / Third Level qualification and that approximately 20% have at most Junior certificate qualifications – more than a reverse of the 1990s. Second, in April 09, one in five (20.2%) of the unemployed on the Live Register were non-Irish nationals. This compares to almost 0% in the 1990s. Third, a high proportion of current recipients of unemployment related welfare payments are persons in work – almost one in six (16.2%) based on Live Register figures for April 09. Again, different from the 1990s.

All agree that preventing the flow into long-term employment must be a central feature of labour market policy. In the likely absence of an increase in aggregate demand the key challenge, however, is not just responding to “unemployment” in an undifferentiated manner, but addressing the very different employment situations present among persons on the Live Register as well as the hidden unemployed in receipt of disability related payments. One think is clear, however: the policy package and institutional structures put in place to address “unemployment” in the past – and largely still with us – are unlikely to work in present circumstances both on the demand and supply sides.

There’s a lot of broken homes, an rnpatioeshils due to the Sitiuation of Our economy.However, if its long term or short term unemployment it’s very difficult to maintain a level head when your facing the possibilty of loosing everything you’ve worked so hard for. Therefore, it’s important to continuing supporting your mate thru a rough time because supporting each other thru the storm you’re dealing with can either build your relationship or destoy it. If you’re Married remember the vows an stick to them even in the midst of long term unemployment an have Faith that Our Lord and Savoir will bring you thru.

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