Equilibrium Unemployment

Philip OConnell stresses the importance of activation measures for preventing long-term unemployment in today’s instalment of the Irish Times series on the jobs crisis.

Although the series has in part focused on ways to limit the rise in cyclical unemployment, the main focus is on policies to limit the rise in the equilibrium (or natural) rate of unemployment.   A crude characterisation of the equilibrium rate is that it is the rate that persists even when the economy returns to potential output.   

The IMF estimated in its Article IV Consultation Report in July that Irelands output gap would average 6.3 percent this year, and that this gap would not be completely eliminated until 2015 (see Table 4, p. 31).   However, the unemployment rate is forecast to still average 9.5 percent in 2015, which can be taken as the IMFs estimate of the equilibrium rate.  The unemployment rate averaged just 4.4 percent in 2005; a point at which the IMF believes the economy was operating close to potential.  A likely legacy of this recession, therefore, will be a more than doubling of equilibrium unemployment rate. 

The persistent rise in unemployment rates in many European countries in the 1970s and 1980s led to a major research effort to understand its causes.   One of the most interesting empirical papers to emerge from this effort is by Olivier Blanchard and Justin Wolfers* (paper here).   They set out to explain the striking diversity in the unemployment experiences across countries over these decades, with countries such as the Netherlands at one end of the spectrum and Spain at the other.   It is generally believed that the sorts of policies and institutions that are the focus of the Irish Times series matter, but the puzzle was that there had not been large changes in these policies/institutions over the period when the average unemployment rate had risen so dramatically.   Their paper focuses instead on the interaction between policies/institutions and macroeconomic shocks, hypothesising that some systems are more resilient to shocks than others.  

The Blanchard and Wolfers findings are worrying in the context of the massive macroeconomic shock we have just experienced.   Running down through the list of policies/institutions associated with weak resilience, Ireland generally scores poorly: high replacement rates and long-duration benefits, weak activation policies, relatively strong unions, etc.   Moreover, even on some measures where Ireland had an advantage notably nationally focused wage bargaining and a low tax wedge this advantage eroded as the recession hit.   The combination of the massive macro shock and less-than ideal labour market policies and institutions presents a serious policy challenge.   The Irish Times series is certainly timely. 

*Blanchard, Olivier, and Justin Wolfers.  2000.   “The Role of Shocks and Institutions in the Rise of European Unemployment: The Aggregate Evidence”.   The Economic Journal, 110 (March): C1-C33.

50 thoughts on “Equilibrium Unemployment”

  1. Could you please give the title of the Blanchard and Wolfers paper (is it The Role of Shocks and Institutions in the Rise of European Unemployment?).

    I’m usually skeptical of cross-country panel data econometrics on regressions (eg how to deal with Spain, highly flexible or highly inflexible), but to the best of my knowledge the evidence on institutions and unemployment is at best mixed.

    There are supply side issues to long term unemployment, but the current jobs crisis is demand led. While we should prepare for the future supply side issues (and I appreciate that even during the boom our participation rate wasn’t exceptionally high even then), we can’t ignore the current demand side problems. Rather than deal with future entrenched unemployment I think its best we minimise future problems by tackling todays crisis of insufficient labour demand.

  2. @John McHale

    …the striking diversity in the unemployment experiences across countries over these decades, with countries such as the Netherlands at one end of the spectrum and Spain at the other.

    JTO again:

    The differences between the unemployment rates in different countries are far less when part-time working is taken into account, when the numbers on invalidity benefit are taken into account, when the length of the working week is taken into account, when the retirement age is taken into account, and when even things like National Service are taken into account.

    The Netherlands always comes near the low end of the spectrum when the unemployment rate is taken into account. But, in the Netherlands almost half of those in employment are in part-time employment (ie less 20 hours per week on average). This is effectively a way of fiddling the figures. In Ireland, the figure for part-time employment is around 20 per cent.

    Some other countries, notably the UK under the recently-deceased Labour Government, have fiddled the figures by moving millions of people from unemployment benefit to invalidity benefit. Although the new Con/Lib government has promised to reform the system, under the last Labour Government, millions were shoved on to invalidity benefit while suffering from virtually no ailment that most people would recognise as deterring one from working.

    In France and some other countries, the number of hours people are allowed to work per week is regulated by the government and is very low, while, as their recent wave of national strikes has highlighted, their retirement age is also ridiculously low. I’m 61. In Ireland and the UK I’m expected to work at that age and do so, to the tune of 50/60 hours a week on average. In France and some other countries, assuming I wasn’t arrested for working more than the maximum number of hours per week that the government allows, I’d long ago have been sent off to spend the remainder of my days sipping wine on some Mediterraenean beach.

    What should be used as the standard for comparison between countries is not the unemployment rate, which is easily fiddled and is affected by the things I mentioned above, but the employment rate for the population aged 15 to 64, adjusted for average number of hours of work. On this basis, the difference between Ireland and the OECD/EU average is now far less than in the 1980s. Back then, the proportion of the population aged 15 to 64 at work in Ireland was about one-third less than the OECD/EU average. By 2007, it was much higher in Ireland than the OECD/EU average. In 2009/2010, even at the bottom of the recession, it is about the same as the OECD/EU average, with every likelihood that it will go back up above the OECD/EU average as growth recovers. That is one of the reasons why the level net emigration during this recession has turned out to be far lower than forecasters such as ESRI predicted.

  3. But, in the Netherlands almost half of those in employment are in part-time employment (ie less 20 hours per week on average). This is effectively a way of fiddling the figures.

    I’d only agree to the extent that part-time working is involuntary. I agree that employment rates are probably the better measure (but account for those in 3rd level education).

  4. Rory,

    The reference is now added.   Sorry for not including it before.  I take your point about the non-robustness of cross-country regressions.   I see this evidence as suggestive though not definitive.  However, based on the work of the OECD, Layard, Nickell, and Jackman, etc., I think we have a reasonable understanding of the kinds of policies and institutions that are associated with higher equilibrium unemployment.   I also don’t disagree agree with you about the importance of labour demand, though I think we do disagree about the degrees of freedom the government now has to use fiscal policy to support it.  I suppose my broader point in that under the surface there is also likely to be a large increase in equilibrium unemployment, and we need use what we know in terms of the policy literature to limit this increase. 

  5. JTO,

    I take your point.   But even taking this into account, the unemployment rate (and I would add the average duration of unemployment) are important measures of labour market stress.  Whatever way you look at it, based on the survey definition, these are people actively seeking work but currently do not have a job.  Cross-country comparisons of this measure are meaningful.

  6. While an emphasis on Active Labour Market Policies (ALMPs) here it is important not to look at their “Passive” equivalents (though it is unlikely to make you many friends). One reason for such a focus is that the evidence on many ALMPs is not encouraging or is simply scarce – or indeed non-existent for Ireland. One observational study for Ireland (Conniffe, O’Connell & Gash http://www.esr.ie/vol31_4/1Conniffe.pdf) found no effect of general training on employment. J.Kluve (Labour Economics, in press) provides a recent overview for Europe.
    The most obvious Passive policy is the system of unemployment benefits. High replacement rates combined with long durations of entitlement do not help. One feature that the research on cross-country unemployment patterns has brought out is that its not simply the numbers (how much, how long) but how the system is implemented: for example how rigorously the “work test” is applied.
    A second point to remember is that there isn’t one replacement rate. There is huge variation within the population because of variation in entitlements to social welfare allowances, medicalcards etc. Gurdgiev on his blog came up with estimates for different groups. I don’t know accurate or representative they are but there were some pretty high ones in there (like>100%).
    A third point is that Active and Passive policies interact or at least they should. In the Swedish system there is a very extensive set of ALMP’s but one’s entitlement to benefits doesn’t last for ever and depends on participation in labour market programs (see Barbara Sianesi’s REStats paper for example). So they have an integrated system of carrots and sticks.
    Finally the passive labour market policy that dare not speak its name is the National Minimum Wage. How appropriate is the current level for the present labour market? When it was introduced, in a very tight labour market, it was pretty much at or below the going rate for unskilled jobs so it didn’t do much good or harm, I’d say. Those circumstances are becoming a distant memory.

  7. http://www.nakedcapitalism.com/2010/11/germany-draws-line-in-the-sand-on-eurozone-bailouts-insists-bondholders-take-pain.html

    I am fairly sure that the refusal of people to spend money unwisely is at the heart of the unemployment problem. Damn them! When we have a credit bubble the return to a normal economy takes a decade or two. People have been misled for a decade of indulgence, building crappy houses that were not needed, and now they are obliged to pay for the banks that caused it! This additional burden virtually guarantees a two decade hiatus in spending.

    Ask Japan?

    Maybe, this time, unemployment is here to stay as 2,000,000,000 people take up the slack elsewhere, in a very, very low cost economy or two. They really have a competitive edge there! We must study their methods, which are coming to Ireland over the next two decades, in order to replicate their economic miracle, as we stole the title of the Asian tigers. Ireland was really the Celtic Boomerang?

  8. There is huge variation within the population because of variation in entitlements to social welfare allowances, medicalcards etc.

    I consider that a good reason for universal provision of medical cards, education, childrens allowance etc.

    Socially/politically it is necessary to provide such things as they are the preferences we have for society, but some people are afraid to go from a 3 day week to 5 day week because they’ll move into a higher income bracket and lose their medical card. I suppose that’s the sort of supply side policy I’d like to see.

  9. A whole generation is going to be lost to long-term unemployment in Ireland and around the world. These people will never work again, at least not in a full-time capacity. But then, that isn’t necessarily a bad thing depending on personal circumstance.

  10. I saw a quote from some Euro head in the FT saying that 1.5% growth per year is required in the Eurozone to keep unemployment stable. Has any study looked into how unemployment could be stabilised with lower or no rates of growth ? Long term permagrowth is a dud ideology i.m.o.
    I have been reading some stuff on the tendency of the advanced capitalist economies to stagnation.
    Is stable employment essentially dependent today on the continued expansion of credit ?

  11. Equilibrium Unemployment? Sound’s a bit like Say’s Law, the theory that unemployment cannot increase indefinitely as eventually wages will fall and labour will become cheap.

    The Great Depression disproved that theory. And I think the coming double dip in the recession will disprove any notions that any country can have some kind of a natural unemployment rate about which it oscillates. The only limits you can set on the rate are 0% and 100%.

  12. @ seafoid

    With zero growth unemployment is inevitable in a market economy as technology would make workers redundant. However I think its important to distinguish between zero economic growth and zero growth (and decline) in the use of material inputs. If we all wrote music and computer programs, and cut hair there wouldn’t be much increase in material inputs, but the economy would still grow.

    @ObsessiveMathsFreak

    I’m cautious of how the term is used, but even in a booming economy there will always be some people who are genuinely between jobs and searching for a few weeks.

  13. Nobody does macroeconomics any more.

    When half the world is trying to pay down debt and the the German, Japanese and Chinese trying to accumulate debt, the only equilibrium is an under-employment one. The equilibrating variable is our unemployment rate. I think it’s all in the General Theory.

  14. @seafoid – “Is stable employment essentially dependent today on the continued expansion of credit ?”

    That’s my reading of it yes.

    We’re all (the West for now anyway) going to hell in a handcart.

  15. In the peak bubble year, Ballina in County Mayo had the highest unemployment rate among large Irish towns, with 15.8 per cent 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 percent, with urban areas (9.5%) having higher unemployment than rural areas (6.9%).

    So many points can be made about unemployment statistics but I guess that 200,000 would be a reasonable number for those who wish to have full time employment.

    Economists at the Brookings Institution think-tank in Washington DC, said recently that it may take 12 years for American employment to return to the pre-recession level based on average jobs growth in the 2000s.

    http://www.finfacts.ie/irishfinancenews/article_1020755.shtml

    Given that only 11,000 net jobs were added in the Irish internationally traded goods and services sector in the period 1998-2007, how long will it take to add 200,00 net new jobs, without allowing for changes in population?

    The issue of employment is still dominated by spin and denial.

    The world has changed and the question now is how much of unemployment is cyclical and how much structural?

    Minister Batt O’Keeffe is in Jeddah or Riyadh today and 2 press releases have been issued by his department.

    The great unwashed via easily impressionable journalists, may buy the line that it is easy for ministers to conjure up export business.

    It isn’t and having lived 6 years in Jeddah, I may know the market a little better than O’Keeffe.

    There is no obvious growth engine despite the mantras on exports; only fools believe that university research is the main answer; upskilling and short-term measures can have some short-term benefit, but why should we believe that we can generate jobs from multinational exports to debt-challenged advanced countries now, given the very poor recent record during unprecedented credit and asset booms?

  16. We had horrible unemployment in the 1980s that was temporarily solved by a long construction boom and by enticing in high-tech multinationals during the dot net boom. We have done a good job convincing the multinationals to stay throughout the last 10 years and it is imperative that they remain. However, the wheels have come off the other part of the “strategy” (if you can so call it) i.e. the construction boom has turned to bust.

    We need a brand new industrial base to employ all the unemployed construction workers, suppliers and others affected by the bust. The great (but delusional) thing about the construction boom is that it provided employment for working class and uneducated people in every small town in Ireland. Something similar is needed if we are ever to get back to 2005 levels of employment.

    Not everyone wants to, or will be able to, live in Dublin and work in the “knowledge economy”. We need a manufacturing industry that can be rurally based and requires lots of blue-collar workers. Obviously we cannot compete with China, so we must focus on high-tech high-quality engineering (like Germany and Switzerland), and we must leverage our natural resources such as wind and tidal energy or other marine resources. Alternatively we could and should try to cultivate our natural advantage in the agri sector.

    In any case, until we develop a whole new sector of the economy, the IMF is right – the natural rate of unemployment will remain at around 10% instead of at 5%.

  17. http://www.cso.ie/statistics/empandunempilo.htm

    According to the CSO web-site, the peak-to-trough fall in construction employment hasa been 144,300, or 57% of the total fall in employment (254,400). That’s definitely a response to an aggregate demad shock, but the key question is: how permanent (or long lasting) a shock. I don’t know what supply or demand side measures can do anything for these victims but I hope you geniuses come up with something quickly. This looks like long-term unemployment to me. Or emigration.

    By the way, on that same web-site, ‘Health and other social work activities’ employment has NEVER been higher (234,900, up 7,100 on a year ago, up 49,300 on five years ago. Public Administartion employemnt has also NEVER been higher. No doubt the CSO has this completely wrong).

    I know I’m starting to sound like the anti-matter version of JtO, but it is only when you immerse yourself in the data do you realise the scale of the catastrophe that has occurred in the public sector over the past decade. The banking crisis has deflected attention from this: but this country’s other big problem is the increase in current public expenditure of euro 20bn that has taken place in 2005-10 (inc) period.

  18. @ Michael Hennigan
    There is no obvious growth engine despite the mantras on exports; only fools believe that university research is the main answer;

    I believe that you are absolutely correct on above and in your final paragraph.

    @Simpleton.
    It hardly makes sense for an indebted western economy to keep paying unemployment benefits to a significant % of its population while the rest of the population imports from Germany, Japan and China keeping their peoples gainfully occupied.

    Not being an economist, I am not clear how the General Theory proposed to deal with this.

  19. @Joseph
    Our (indebted countries) unemployment rises to the point where our demand for German etc goods falls to equilibrate both our imbalance and theirs. A very high unemployment rate. The General Theory showed how this can happen and how it can persist once it has happened.

  20. For reasons I cannot explain my “While an emphasis on Active Labour Market Policies (ALMPs) here it is important not to look at their “Passive” equivalents”
    should have actually read “While an emphasis on Active Labour Market Policies (ALMPs) here is understandable it is important also to look at their “Passive” equivalents…”. D’oh.

    My sense is that nobody here actually wants to do some hard thinking about labour market reforms or, perish the thought, look at the evidence. Far better to sound off about the usual guff. It passes the time, I suppose.

  21. @ Joseph

    I see from yesterday’s Sun that Wayne Rooney spent GBP 90K on his son’s first birthday party. At some point in the medium term it will become obvious even to the media that the levels of income inequality in Western society are unsustainable and that there has to be a redistribution of wealth away from the ultra rich. Otherwise the whole system is going to collapse.

  22. @Kevin Denny
    As John McHale has observed, there has actually been an awful lot of hard thinking done about the labour market and an awful lot of evidence based ideas about what works, and what doesn’t, by way of policy. It is an area where there is a surprising amount of agreement, and lack of controversy, amongst professional economists. Layard, Jackman and Nickel would be a good place to start. But I suppose if there is a wheel to be reinvented or a new way to propose futile spending of borrowed money….

  23. @ Kevin Denny

    My sense is that nobody here actually wants to do some hard thinking about labour market reforms or, perish the thought, look at the evidence. Far better to sound off about the usual guff. It passes the time, I suppose.

    Of course labour market reform is important as it was in increasing participation at the time of the pre-bubble FDI dominated Celtic Tiger period.

    You of course should have the professional time to come up with proposals on such issues.

    As for sounding off “about the usual guff,” e.g. demand issues, this is where non-academic contributors may surprisingly have something useful to say – – strange individuals who may have direct experience of creating jobs or developing export markets!

    I say strange as most of the people who do sound off about jobs have no such exposure, be it ministers, other policy makers, academics and media commentators and journalists.

  24. I suppose academics want to reach the comfort zone of “equilibrium unemployment” this pesky unemployment problem is getting a little boring. The terminology of course infers a gross superiority. Also, the assumption that the worst case will be having to shed another 20,000 or 30,000 in salary and never having to be part of the “equilibrium”. It is a natural instinct to want to feel safe even in ivory towers. This time, if the antennae was working, I fear it is not, it would be screaming that this is going to be very different to anything experienced previously. This is not just a blue collar affair this is going to rock the white collar’s of society as it builds in momentum.

    Look on the bright side there will be plenty of Phd material available. Hold on to your seat belts gentlemen, we are about to loop the loop and enter unchartered waters. I see it in the spreads.

  25. @bazza
    “Not everyone wants to, or will be able to, live in Dublin and work in the “knowledge economy”. We need a manufacturing industry that can be rurally based and requires lots of blue-collar workers. Obviously we cannot compete with China, so we must focus on high-tech high-quality engineering (like Germany and Switzerland), and we must leverage our natural resources such as wind and tidal energy or other marine resources. Alternatively we could and should try to cultivate our natural advantage in the agri sector.”
    Well, not all the knowledge economy is based in Dublin… mind you, there is no such thing as a knowledge economy! Which is why I agree with you about needing ‘proper’ jobs. I don’t see that it is obvious we cannot compete with China. We cannot deploy human robots, but there are good bits of manufacturing that don’t involve that.

    Absent from much of the discussion is dirty business – mining. There are resources here. Are we prepared to do it? Or is it better to ship the very dirty rare earth metal extraction required for ‘green’ technologies to somewhere with no environmental controls?

  26. @ simpleton

    As John McHale has observed, there has actually been an awful lot of hard thinking done about the labour market and an awful lot of evidence based ideas about what works, and what doesn’t, by way of policy. It is an area where there is a surprising amount of agreement, and lack of controversy, amongst professional economists.

    Actually there is a huge amount of disagreement and conflicting evidence on both the empirical and theoretical side. There is disagreement among labour economists on everything from the minimum wage, to skill biased technical change, to activation policies. Also given the huge problems with doing robust econometrics on the topic I doubt a consensus will emerge any time soon.

    Add to that that most of the research related to stagnant European economies of the 1990s and 2000s, rather than unemployment due to a slump in demand.

  27. @Rory
    I suppose it depends on what you mean by ‘huge’. But I guess we are going to have to agree to disagree on this one. I think one problem could be the mainstream consensus is something that you disagree with, given that it leans towards supply rather than demand side policies; the mainstream consensus is not something that trade unions, for instance, would find attractive. But that’s a wild stab in the dark on my part.

  28. @simpleton
    “That’s definitely a response to an aggregate demad shock”
    Or a natural result of a bubble. No ‘definitely’ about it. What would Mr. Keynes have said about bubbles? Ah, maybe this:
    “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.”

    The job was ill-done and those jobs now no longer exist, nor should they have in the first place.

    “when you immerse yourself in the data do you realise the scale of the catastrophe that has occurred”
    ‘Nuff said.

    Theory doesn’t even begin to account for this one. There is no equilibrium. There is ebb and flow and temporary balance between them. The scale of malinvestment and misdirection of resources is going to take a while to work out.

  29. @hogan
    Fair enough. The original ‘demand’ may have been utterly ephemeral, but there were not too many calling it as such at the time. And we know what happened to the few that did.
    As of today, where is the consensus, whose opinion is derided or just ignored?
    I think the scale of the catastrophe that is the recent increase in current government spending is not fully understood. What is understandable is that the banking catastrophe took centre stage.
    Those who have noticed a sudden increase in demand for German-Irish translators are on to something: there will be no default until we pay ourselves less than the Germans. The bail-out has arrived, but sequenced with heavy conditionality and lots of hoops to jump through before the cheque is cashed.

  30. Isn’t the massive expansion in public sector spending over the last 10 years just another example of FF using short term income flows to prop up a big increase in long term financial commitments ?

    A recent IT article mentioned a total government budget of £8.7bn in 1987. Perhaps one of you economist types could verify that number.

    1987 wasn’t that long ago. I remember some great hurling matches that year. And this year the number is €71bn apparently. So there you have the problem in technicolour. And a population conditioned to expect spending at the €71bn level.

  31. @ simpleton
    It also depends on what you mean by mainstream consensus 🙂
    (In general I use the term neo-classical or mainstream economics to just refer to a methodology rather than any policy prescription; eg Stiglitz uses neo-classical methods, but isn’t neo-liberal, but I accept people use the terms in varying ways)

    Even with regard to the supply side of things there is no consensus within the mainstream. Whenever I go to a economics conference there are always some papers in favour of things like high firing costs or the minimum wage and then another paper contradicting it.

    I suppose at least the lack of consensus among labour economists leads to job creation for labour economists.

  32. Layard, Nickell, and Jackman in their book “Unemployment – Macroeconomic Performance and the Labour Market” (OUP, 1991) estimated that the “equilibrium” unemployment rate in Ireland in 1980-8 was 13% (see p. 436). They placed great emphasis on the social welfare benefit system as a determinant of this “equilibrium”. However, during the late 1990s and early 2000s, the Irish unemployment rate had fallen below 5% and inflation remained reasonably subdued. There were no major reforms of the social welfare system over the 1990s. What happened is better understood in terms of booming aggregate demand. The prospect now is for a prolonged period of depressed demand and, unfortunately, a similarly prolonged period of high unemployment.

  33. @Brendan W
    It is logically possible that Irelan’d equilibrium unemployment rate was close to 13% in the 1980s. And 5% unemployment was well below any sense of normal, or equilibrium. We may not have had much CPI inflation but there was a fair bit of asset price inlation.
    Yes, aggregate demand waxed and has now waned. But does that mean, by logical implication, that the only way to get unemployment down is to boost aggregate demand? Are there no suplly side issues to be tackled? And, as a purely practical proposition, we can probably agree that a significant positive demand shock is not on the horizon (of, course, shocks are always shocks). Which is why, I presume, you forecast, reasonably, prolonged high unemployment.
    Surely this does not rule out supply side reform as something worth trying?

  34. @ simpleton

    Our labour force participation wasn’t particularly high during the boom suggesting some supply side issues. Things like a lack of activation policies and a lack of affordable childcare.

    I don’t really see the point of a big push on policies on the supply side (apart from retraining/reskilling) while there is such a lack of demand. I would time the policies to deal with demand first, then supply. Of course we should discuss supply policies now so they will be ready for implementation when the economy picks up, but increasing demand now will reduce future problems.

    Also I would divide supply side policies into how they affect income distribution. If supply side policies suppress wages then that could lead to a fall off in demand, and as a whole we would be poorer with nothing to show for our efforts.

  35. @Brendan,

    Aggregate demand is and will be a big part of the story. But I think Simpleton is right that there are critical supply-side dimensions as well.

    In terms of LNJ’s basic framework, one element is the fall in the feasible real wage (or probably more accurately a return to a non-borrowing inflated feasible real wage). This requires an increase in the unemployment rate to bring the target real wage back into line with what is feasible to pay. The greater the real wage resistance of wage setters, the larger the increase in the (supply-side) determined equilibrium real wage there must be bring about the necessary wage restraint. Labour market institutions and policies can affect the steepness of the target real wage relationship, which is consistent with the type of shocks-institutions interaction effect that Blanchard and Wolfers observe. One institution that could have limited the unemployment increase would have been national wage bargaining that recognised the unemployment consequences — and ultimate futility — of excerssive wage demands in light of the large shock to affordable incomes. I think the social partners — and the unions in particular — have a lot to answer for not making soical partnership work when it was actually needed in the national interest.

    Another supply-side dimension is mismatch (others have already referred to the obvious case of construction workers.) There are, of course, similiar debates going on in other countries (Paul Krugman beleives it is mostly aggregate demand for the US — link below). But it hard the deny the mismatch element for Ireland. Philip O’Connell’s proposals for targeting those likely to find it especially difficult to re-enter employment are very important in this regard.

    http://krugman.blogs.nytimes.com/2010/10/11/what-we-learn-from-search-models/

  36. @Rory
    All very reasonable but I would go a bit further.
    Unemployment is up, according that CSO link I posted above, byroughly 200,000 since mid 2005. Over the same period, construction employment has fallen by 126,300. So close to 2/3 of the unemployment problem can be ascribed to a negative demand shock to construction.
    It is tough to see (a) how any demand stimulus of any kind can be delivered given the fiscal situation, the fact that interest rates have begun a long upward journey and the exchange rate likewise and (b) even if demand could be boosted, how it could possibly come from construction.

    So, how do we help these workers, affected by a slump in a sector that will be secular, under most plausible scenarios?

    Also, your point about income distribution would work better if we were a closed economy. Lower real wages domestically would do wonders for our real exchange rate. Demand shocks, if they arrive, need to come from the external sector. Or we need to take market share, hence the need for a lower real exchange rate

  37. Lower real wages domestically would do wonders for our real exchange rate.

    I assume you mean lower nominal wages. If the overall price level falls real wages can be constant and our real exchange rate improve.

    Obviously the fiscal constraints are important, but I would argue that the current account in the national accounts and balance of payments is even more important, but being ignored. We have net exports, but a balance of current account deficit that needs to be payed off. I think we should look at who is sending money out of the country (and tax them more) and who is keeping it/ bringing it in the country (tax them less).

    I think the price level in Ireland is too high. 90c for a bag of Tayto in Dublin Airport and €27 for a one-way train ticket from Heuston to Waterford. Then there are rents. However, the HICP has stabilised. We are slowly improving our position as inflation in the rest of the EU is higher, but we could still improve faster if the government reduced some of its prices and just got the money from tax rather than by stealth. When prices are at 2007 levels its hard to get people to agree to wages below that. Its simply considered unfair.

    Also we could have a balanced budget stimulus. Eg build some schools and fund it out of increased inheritance tax. Building schools won’t solve the economy’s problems, but it should keep people ticking over just long enough for the export cavalry to come over the hill.

    Also I still don’t think the banks are fixed 🙁

  38. I think your idea for building/repairing schools is a good one. But you won’t get the cash from inheritance tax. That horse is bolting – one prominent financial adviser the other day told me that there are ‘lots & lots’ of people shifting their leagl (&actual) residence to Switzerland and Portugal(?) in anticpation of what is coming next.
    A far better plan would be to liquidate 5-10bn of the NPRF and use it for capital spending – particularly on school building as it gets some of those construction workers off the dole as well as the other obvious benefits – during the life of the 4-year 15bn current budget cuts. I think that counts as a near-balanced budget idea?

  39. I agree about the NPRF.

    About inheritance tax, I think there has been an over-concentration of wealth in Ireland. About 39 directors link 75% of Irish companies. We all know the effects of a golden circle. Breaking down these wealth aristocracies will allow fresh talent become managers, and hopefully improve productivity and so on.

  40. My objection is practical: by the time you get to them their wealth will be long gone. Forget about them and concentrate on bringing through the next generation without them wanting to frm the next golden circle of the cutest hoors in town.

  41. Before you cure – or rather can make any attempt at curing, the oversupplied job markets in Ireland, you have to cram down the excess debt. Like, as in default or bankrupcy. No ifs, or buts about this. If money continues to be destroyed by paying down debt – and no additional money can be created via fiat credit – then you have deflation. In a deflationary environment unemployment will continue to increase and will become structural for a very long time.

    For the mathematically inclined: Check out Michaelis + Menten enzyme kinetics. Nifty equation and lots of nice plots. So why do enzymes display those characteristics? Maybe like a labour market they can be saturated and reach a max.

    Brian P

  42. @ simpleton

    What I’m worried about is that the children of the Quinn group and Sean Fitzpatrick are set to inherit lots of money. Also management jobs are effectively inherited in some firms, which can’t be good for the economy. A market can only work effectively if its competitive, and we can see the effects of too much concentration in the banking sector. I accept the difficulties, but if you inherit citizenship I think you should pay this tax. As far as I know some US taxes can chase you around the world.

    @Brian Woods
    I agree the debt has to be repaid/defaulted on. However not many people are looking at this from a national accounts perspective. Before they were just private citizens who would default, so a write down would boost our balance of payments. Unfortunately the government is trying its best to make a write down equivalent to default on the national debt.

  43. @ John McHale

    “One institution that could have limited the unemployment increase would have been national wage bargaining that recognised the unemployment consequences ”

    What effect do you think the mortgage situations of people who bought property between say 2005 and 2007 has had on their willingness to consider wage bargaining and the wider unemployment issue? It is clear that the boom rendered Ireland uncompetitive but isn’t the debt situation preventing wages etc from getting back to a more realistic levels?

  44. @Rory,
    Be careful to avoid your quest for economic solutions doesn’t become a dogmatic attempt at retribution.
    Dynasties in corporate life have their counterparts in inherited Dail seats. It looks to be a fundamental part of irish life; it all looks to need fundamental structural reform. But we have been saying that for decades.
    I think things are the way they are because most people are happy with the results most of the time. Sure, the majority are seething right now but there will be no revolution. When things settle down again, bost debt restructuring, there will be another generation of country solicitors and teachers to inherit their Dail seats, another cohort of cute hoors to take their boardroom seats. This is, after all, a democracy, one whee most people are quite content to play by these rules. It’s only weirdos who inhabit sites like this one who actually believe there is something fundamentally wrong. Once there is a change of government (without changing anything else, including policy) we can get back to what Galbraith sneeringly termed the culture of contentment.

  45. Today’s piece in the Irish Times by Philip O’Connor talks of the ESRI’s profiling model of the unemployment that should allow those vulnerable to long term unemployment to be identified more easily. How confident are we that this model remains valid for this downturn? It seems to me on a very anecdotal level that the labour market might be structurally ‘different this time’ with more qualified people not immigrating as much as they did in the 1980s. My fear would be that while higher education levels will give some of the traditional protection against long-term unemployment the very fact that such higher education levels are now more common might mean we might have a greater need, than modelled, for measures to ensure this kind of labour doesn’t rot in long-term unemployment.

  46. @ Robet Browne
    Greetings. Indeed you do see it. And not just in the spreads. Worsening imbalances at national, EZ and global levels.

  47. @ Seafoid

    “Doesn’t unemployment deserve a category of its own on the site ? If the Lisbon Treaty has one…”

    Despite it’s incredibly high-spec advanced design (;-)) the blog is actually a part time effort on the part of its founder (Philip — to whom massive kudos are due) and its contributors.

    That the Lisbon Treaty is a category perhaps suggests that the categories were set up last year and haven’t been revisited. I wouldn’t read too much into it.

    In any case, contributors can “tag” a post as being about “unemployment” and quite a few people have

    http://www.irisheconomy.ie/index.php/tag/unemployment/

  48. @ simpleton

    I’m not calling for a revolution. I just think we should imitate the US in terms of their inheritance tax (and attitude to white collar crime). I think it would generate some revenue for employment as well as boost long term productivity.

  49. @RO’F: Note your comment. Thanks.

    This debt predicament: it must be resolved – either pay down or cram down, those are the options. The pay down option is a monetary deflation, which if coupled with price rises in energy and food (which are occurring), will put G*P change to either zero or negative.

    The cram down option is the same as we are going to experience by attempting the economically impossible pay down option. The cram down would take three years or so, the pay down ??? Quite a long time I reckon.

    The usefulness of the cram down option is that is sends a clear message to the ‘markets’ (whatever they be) – “welcome to Club Austerity”

    Brian P

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