Job Subsidy Plan “Announced”
This post was written by Karl Whelan
The long-mooted job subsidy plan appears to be about to happen, though as is often the case in Ireland, the public can only learn about this through leaked details from social partnership talks, rather than through the publication for discussion of detailed government proposals.
The scheme will pay qualifying firms €200 per week (€10,400 per year) per employee. The Irish Times reports the scheme as being aimed at vulnerable firms. However, on Morning Ireland, Ingrid Miley reported that to qualify for the subsidies, firms will have to show that “they were not in difficulty before last July” and “that they have a strong likelihood of being viable going forward”.
These restrictions are most likely in place to deal with the point I made in my IT article on this topic—“to the extent that some of the failing businesses that would receive such support simply may not be viable over the next few years, these schemes can end up pouring money into firms whose workers still end up losing their jobs.”
However, to the extent that the scheme avoids no-hoper firms, it slants the outcome towards the more obvious source of deadweight loss: Supporting firms who would have kept the vast majority of their workers in any case. Looked at this way, the scheme is very expensive. If the effect of the subsidies (relative to the case where they are not paid) is to save one in five jobs at the supported firms over the next year (a high figure, I would guess) then the cost would be €52,000 per year per job saved.
Ingrid Miley’s report also raised an important practical issue, which is the legality of providing this type of assistance to one firm in an industry because it is performing poorly, while another firm that is performing slightly better does not receive the assistance. Beyond the issue of compliance with EU State Aid rules, it raises the question of lawsuits and perhaps suggests that the scheme may end up being applied in a blanket fashion to all firms in sectors characterized as being weak.
The media reporting of the exact scale of the scheme is confusing. As I understand it, the budget for the scheme up to the end of next year will be €250 million, with a maximum payment period of 15 months. Over a fifteen month period, the cost per worked covered would be €13,000. A figure of 30,000 workers has been mentioned. If all of those 30,000 were covered for fifteen months, the scheme would cost €390 million, so I’m guessing the smaller budget is based on a gradual roll out of the scheme.
In addition, because ICTU had been asking for a scheme with a price tag of €1 billion, the discussions on Morning Ireland mention the possibility that the scheme could be extended or enhanced to cost this much. However, without understanding a time-scale for this €1 billion figure, it doesn’t mean very much.
With the support of ICTU (looks like they’re doing something about unemployment) and IBEC (money for businesses) and a sales pitch about how it’s “doing something to deal with the jobs crisis” it’s hard to see our colleagues in the Fourth Estate reporting this proposal in anything other than glowing terms, with the only criticisms reported being that it’s not big enough. (The IT article’s reference to “assisting up to 30,000 people” makes the scheme sound great though, of course, most of those 30,000 won’t see a cent of this money and few will have actually had their jobs saved by it.)
That said, I would recommend to any journalists reading this (I know some do even if they wouldn’t want to admit it!) that they talk to a few economists about this—they might be surprised at how much agreement there is that these schemes are expensive and ineffective. To my mind, the principal “jobs at risk” being saved by these proposals are those of Misters Cowen and Lenihan.
Tags: Job Subsidies, Unemployment
June 24th, 2009 at 11:14 am
Couldn’t agree more, the Irish Twittersphere is equally appalled this morning it seems - this is the problem with social partnership: when three typically rival groups have a common interest, they’ll happily spend someone else’s money.
June 24th, 2009 at 11:33 am
If you want journalists to drink from your well, best not poison it.
E.g., “it’s hard to see our colleagues in the Fourth Estate reporting this proposal in anything other than glowing terms, with the only criticisms reported being that it’s not big enough.”
There’s more to the media than morning-after pieces from RTE and the Irish Times. Give us a chance.
June 24th, 2009 at 11:53 am
Sorry John but we have to call it like we see it. The harsh reality is that much of the treatment of economic issues in newspapers is very poor (you shouldn’t take that as a personal criticism of you and your work because it’s not.) If you don’t want to represent my opinions because you think I’m harsh on journalists, then so be it.
Academics get negative treatment from media and politicians all the time (ivory tower, don’t understand the real world, public sector etc. etc) and we have to have a thick skin if we want to come out and say something. (Similarly debates between academics are often very rough). So I don’t see why criticising journalists should be somehow beyond the pale.
On this issue, I will be very surprised if the vast majority of the coverage isn’t slanted in favour of the plan, with the only criticisms reported being that it’s not big enough. And when the media coverage is slanted in one direction, it’s worth pointing out to those that really want to understand what’s going on why that’s the case.
June 24th, 2009 at 11:58 am
Whilst I agree with the general sentiment of the post (policy decisions need to be informed by detailed policy analysis) I think you are failing to recognise that innovation in policy requires some element of risk. Ireland is experiencing a jobs crisis. To tackle it requires thinking outside the box, and policy innovation.
If the ESRI’s predictions are correct unemployment could reach 17 per cent by the end of 2010. The quantitative effect of this on social welfare spending (dont have time to do the fugures now) would be extraordinary. The qualitiative effects upon the individual and society even bigger. Thus, it is an extremely important issue that requires a detailed and nuanced policy response.
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 at a recent ESRI conference on labour market policy. 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.
Thus, the premise of labour market policy (particularly amongst economists) during a jobs crisis should, surely, not be a casual general statement that “subsidising jobs are expensive and ineffective” but a nuanced examination of what type of subsidies work, how should they be applied, and how should the funding be integrated into a wider labour market policy framework concetrating on training, reskilling and faciliating market demand.
On this basis (accepting that something needs to be done about the jobs crisis) I would be interested to hear what constructive policy advise economists would give to decsion makers on how Ireland should tackle the growing crisis in unemployment.
June 24th, 2009 at 12:17 pm
@Aidan
Just because I’m expressing my opinion here in the form of a blog post does not mean that there hasn’t been any nuanced examination of these issues. Quite the contrary — there has been plenty of work done on the effect of various schemes like this in the 1980s and they were found to be ineffective.
Unfortunately, most of them are not available on the web but one worth digging out of a library is Lehman and PP Walsh “Employment Schemes in Ireland: An Evaluation” Economic and Social Review, October 1990. In fact, these schemes were probably better designed than this one, being focused on helping get unemployed into jobs rather than subsidising existing jobs. These schemes are not “innovative” or “outside the box” — they are tired old politically motivated plans to show that politicians and others are “doing something”.
The recent ESRI workshop on labour markets — available here http://www.esri.ie/news_events/events/forthcoming_events/event_details/index.xml?id=218 — has lots of useful material on labour market policies.
But there is no simple Magic Bullet solution to the problem of unemployment. With labour demand weak because of global recession and our own banking and fiscal problems, there is a limit to how much can be achieved by this kind of thing. I know that’s an unpalatable message but they don’t call us dismal scientists for nothing.
June 24th, 2009 at 12:20 pm
@Aidan: I believe labour intensive construction projects have been mooted by some (insulation, enviromental tech, school upgrades etc…).While not a subsidy, such measures would do better at retaining jobs. When it comes to spending 250M euro (or a billion or whatever), there are certainly better ways it could be spent to save jobs.
June 24th, 2009 at 2:33 pm
Can’t agree more with the sentiments expressed in by Karl - instead of evidenced based open government we get deals behind closed doors on the basis of negotiations with lobby groups - nothing learned at all.
The issue of job creation/protection has been debated on this site on loads of occasions. While there are loads of different opinions I think all are agreed that we should base policy on sound analysis. There is lots of good research out there to help make innovative policy. It might be interesting to analyse whether social partnership has helped or hindered innovative and effective policy.
In anticipation of job creation schemes in construction I wrote a recent working paper so that nobody can turn around in the future and say ‘nobody told us’. The evidence is very clear - such schemes are expensive, create only temporary jobs and prevent the necessary adjustment in the economy. The only thing in favour is the fact that some people get/keep jobs for a while until the inevitable adjustment takes place.
June 24th, 2009 at 2:42 pm
Hi Karl
A quick question! Lehman and PP Walsh “Employment Schemes in Ireland: An Evaluation” Economic and Social Review, October 1990 - Is this available in the UCD library or on the e-journal surver? Looking to write a brief article on this new job subsidy plan for my internship this week cant seem to locate it on the library surver.
June 24th, 2009 at 3:21 pm
Government picking winners and losers, nothing can go wrong.
Firms in difficulty but clinging on are now doomed because their competitors are state subsidised!
June 24th, 2009 at 3:23 pm
If the government really wants to use €250 million to support the labour market, would it not make sense for it to simply use the money to hire people itself? This would seem to address some of the criticisms of the subsidy scheme.
June 24th, 2009 at 4:11 pm
@JC
“If the government really wants to use €250 million to support the labour market, would it not make sense for it to simply use the money to hire people itself?”
Unfortunately that’s what it has been doing for the last 5 years.
June 24th, 2009 at 4:56 pm
A few comments mainly on the political economy and ‘rhetoric of policy’ aspects of this:
1. @Aidan above–a recurrent problem with the rhetoric of innovation—you refer to the need for ‘innovation in policy’—is the privileging of novelty over substantive merit, which recurs in the language of many policy makers.
This is probably a specific case of the dubious transfer of analogy between innovation in science and technology domains, where we might imagine most innovation represent improvements almost by definition, to the policy domain, where innovation has an overblown cachet.
That’s assuming that job subsidies for existing firms identified by the State is actually a new thing, which as others indicate, it’s a fairly shop-soiled by now.
2. What is omitted also in uncritical reported accounts of such schemes are the invisible losers, that is firms and workers, not yet in existence and made marginally less economic by the extra taxation (either current or postponed through borrowing). Such firms are politically invisible, since they don’t yet exist, and perhaps it’s a very speculative exercise to estimate the quantitative significance of such an effect, but one function of political and policy leadership is to explain and take into account the unintended and difficult to perceive consequences of alternative proposals.
3. Relatedly, the policy rules being considered now once again differentially reward lobbying ability over entrepreneurial endeavour. Such bias towards encouraging “rent-seeking” behaviour is perhaps the most pervasive unrecognised long-run impact of many interventions. Do you do better in Ireland changing the rules of the policy game e.g., by affecting the criteria for being a favoured firm in this case, or by getting on with the business of business?
A focus on the general logic of a policy rule, at least in a public choice/political economy framework, is at least at complement to economic cost-benefit analyses of specific ’schemes’.
4. Finally, Karl W’s doubts about the legality (at an EU level or otherwise) are well taken, and I would add to this that in most public discourse on such matters, such legal concerns are often presented as irritating barriers in the way of needed policy, barriers which can be finessed or overturn by more lobbying (fighting for Ireland in Brussels).
What is usually missing in this discourse is any appreciation of the underlying logic of such rules. In the case of the EU, the policy gains from hard constraints on the ability to date of national governments to favour national firms, i.e., the policy mistakes thus far avoided or prevented, finds few advocates: another example perhaps of the relative political visibility of ‘winners’ from government intervention, and the relative political invisibility of the losers i.e., mostly everyone else.
June 24th, 2009 at 6:44 pm
@ Erol
I’m afraid there’s no electronic copy of the Lehmann-Walsh paper. I only read it myself last week because PPW called by my office to give me an old offprint copy. As editor of the ESR, one of the things I’m looking into is getting our non-electronic archive 1970-1998 scanned and put up online. The journal celebrates its 40th anniversary next year and it would be nice to get that done in time. On a practical level, I think we have lots to learn from the research done in an earlier generation when our economy faced similar problems.
June 24th, 2009 at 6:52 pm
Re: Karl, Aidan Kane, Michael et al
I agree there is no magic bullet to solving the problem of unemployment. But, there must be a range of bullets to choose from, and ultimately a bullet must be chosen. My sense of this is that doing nothing (particularly in an economic recession) will cause more harm than doing something. We know very little about how the government intends to spend the €1 bn on job protection, but it has been muted it will take place as part of an overall economic recovery programme. I sense Fianna Fáil are pretty desperate for a deal to be done (given their fragile political position at the moment) and are eager to signal they will spend the money, rather than think through how the money will be spent, how the programme will work, and all the other finer details that will be required.
But, in and of itself, providing some sort of stimulus package aimed at job retention/creation is a good idea. The finer details are, of course, more important. Thus, there is an opportunity for a robust debate (akin to the banking crisis and the diverse policy responses) to emerge on what type of labour market programmes should be adopted. At the ESRI labour market policy conference in April two main policy proposals emerged (whether they are old or new is less relevant than whether they work).
They were a) provide extra training/education/ reskilling and employment programmes aimed at existing demand within the market and b) provide employment subsidies for employers. If my memory serves me correct, these ideas were not really thrashed out but emerged in discussion. 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
Thus, the profile of those losing their jobs is not that different from previous economic recessions, although the ‘other’ may contradict this. Now, I am not an economist, but in my opinion, active labour market supply measures are pretty futile if there is no demand. Thus, the emphasis should be placed upon creating demand. The question is whether this can be created in the private market, and if not, can the state step in and do something (in the same way it did for the banking sector).
I therefore agree (with Michael above) that focusing upon labour intensive construction projects (school building etc) is a better way to create jobs. But, to do this, may require an acceptance that demand for labour in recessionary periods may have to come from public bodies rather than the private market. This requires reconceptualising the role of the state-in-the-labour market. The social and individual effects of unemployment are too large to wait for the private demand to pick up again (which could be anything from 5 - 15 years). In this regard (and in agreement with Paul Krugman) we ought to avoid a simple dichotomy of private sector job creation or no job at all.
Now, I am not for a moment advocating public sector job creation. But, subsidising firms to create demand for construction skills through advancing school building programmes, roads and a whole host of other labour intensive activity seems to make rational sense to me. Alternatively the demand could be created by public bodies themselves. However, if there are better ways of doing it then they should be circulated in the public domain.
In relation to the points you made Alan K about ‘policy innovation’. I accept that there may be a sense of rhetoric surrounding the term, and that substantive content matters (as I illustrated in latter half of my post). But, the problem and question remains; we have a jobs crisis. What labour market policies should decision makers adopt to solve it?
June 24th, 2009 at 10:04 pm
i wonder if financial firms would qualify? if so i think we’ll get in some ‘trouble’ and i’ll fire everybody tomorrow! lol…
i’ve seen some doozies recently but this one is currently in 1st place
June 25th, 2009 at 7:39 am
Aidan “We know very little about how the government intends to spend the €1 bn on job protection, but it has been muted it will take place as part of an overall economic recovery programme” - I don’t believe they actually have one but here’s a prediction: Savvy larger scale employers will (as they have done in the past throughout the world) take every advantage of any money being waved around and threaten that they will lose jobs unless the government gives them nnn hundred euros per week to subsidise them and they will also use it as an opportunity to continue cutting wages. Smaller scale employers will then go to the wall/go to hell having hung on as best they could for the past year. It will probably be another billion used up to no great effect. Mark my words.
June 25th, 2009 at 7:43 am
It is only 0.25 Bn. The money gets spen in he economy.
Not 40Bn. Which stays outside the economy.
It is NaMa, you clever economists!
June 25th, 2009 at 8:03 am
Karl
Sounds like Alan and Brian are cribbing your ideas. BL on the radio this am was suspiciously like your points above….
June 25th, 2009 at 9:42 am
Wouldn’t cuts to employers prsi and the minimum wage be much less distortionary ways of supporting existing and creating new jobs?
June 25th, 2009 at 10:09 am
[...] point I had meant to make in yesterday’s post about job subsidies but forgot to was the following. Beyond the fact that these programs are [...]
July 10th, 2009 at 8:48 pm
[...] these detailed discussions with ICTU have changed the proposed scheme from the one criticised by me, Sarah Carey, and of course, David Begg. But there is no information in the official announcement [...]
August 6th, 2009 at 3:28 pm
[...] job subsidy scheme is open for applications from today until the 4th of September. I’m still not a big fan of this scheme, particularly given that it has to fit within overall budgetary parameters and thus [...]