Archive for June, 2012

Measuring Youth Unemployment

By Brendan Walsh

Friday, June 29th, 2012

The problem of youth unemployment has rightly been highlighted as one of the major issues facing European countries today.  The newspapers have fastened on the shocking statistic that the unemployment rate among Spaniards and Greeks aged 15 - 25 is about 50 per cent, while the rate for the EU as a whole is about 20 per cent.  These are alarming numbers, but they are also somewhat misleading.

As Stephen Hill pointed out in a piece in the Financial Times on June 24th, the unemployment rate may not be the best measure of labour market conditions among young people who have opportunities to stay in the educational and training systems rather than entering a depressed labour market.  For this reason, an alternative measure, the unemployment ratio, has gained currency.

The conventional unemployment rate is  the numbers ‘unemployed’ as a proportion of the ‘labour force’.  The ‘labour force’ is the sum of the employed and unemployed.  The ‘unemployed’ are those actively seeking work, but not at work. (For young people it is of interest to break unemployment down into those ‘looking for first regular job’ and those who are ‘unemployed having lost or given up previous job’.)

The problem with using the  unemployment rate to measure labour market conditions among young people is that the denominator does not include those who are in the educational system or on full-time training courses.  During a recession, the higher the proportion of a youth cohort that stays on in school or college or in training, the smaller the labour force and the higher the unemployment rate. This is perverse.

By using the whole cohort as the denominator, the unemployment ratio avoids this pitfall and it may be argued that it therefore provides a clearer picture of hardship being caused by the lack of employment. (Of course this is subject to the reservation that increased educational participation may involve putting square pegs in round holes, with some young people taking courses in which they have no interest.)

The limitations of the unemployment rate as a measure of labour market conditions among the youth population is acknowledged by Eurostat, who now publish both the ratio and the rate for the population aged 15-24.  (Their recent figures for Ireland for 2011 are low and may not reflect the latest Census returns.)

The distinction between the unemployment rate and ratio certainly matters.  Data in the recently-released 2011 Census of Population volume This is Ireland Part 2 show the population classified by ‘principal economic status’. These reveal an unemployment rate of 38.7 per cent among the population aged 15-24 compared with an unemployment ratio of 14.2 per cent. While the ratio of 14.2 per cent gives no grounds for complacency, it is less alarming than the headline rate of almost 40 per cent.

It is perhaps even more important to note that the unemployment ratio has not risen as dramatically as the unemployment rate since the onset of the recession in 2008. The Figure displays the three concepts based on the 2006 and 2011 Census data.

(The Table at the end provides more details.)

Whereas the unemployment rate rose by 140% the ratio rose by 90%.  Thus, the rate tends to overstate both the level of unemployment among young people and the rate at which it has risen.

It may, however, be objected that the unemployment ratio includes all those who are not in the labour force in the denominator but excludes discouraged workers and similar forms of disguised unemployment from the numerator.  This bias would certainly be significant among older workers, who are more likely to cease looking for work and to drop out of the labour force because no jobs are available.  Its effect on the youth data, however, is smaller because labour force categories other than ‘employed’, ‘student, and ‘unemployed’ are relatively unimportant among the young.  In 2011 less than 2 per cent of population aged 15- 24 are classified as ‘looking after home/family’!

None the less, to take account of ‘dsicouraged workers’ it is worth looking at another concept that has gained some currency .  This is the NEET ratio. It refers to the proportion of the population that is Not in Employment, Education or Training.  To calculate this ratio for Ireland I have assumed that those in ‘(full-time) training’ are classified as ‘students’ in the Census.  The resulting ratio must, by definition, fall between the unemployment ratio and the unemployment rate.  From the Figure we can see that it lies closer to the unemployment ratio. Moreover, it has risen less rapidly than either the unemployment rate or ratio.   In 2011 the NEET ratio was ‘only’ 65 per cent above it 2006 level.

It is striking that the widely-used unemployment rate is so much higher, and has risen so much more, than the alternative – and arguably better – measures of the situation in the youth labour market.

The reason why the unemployment rate overstates both the level and rise in Irish youth unemployment is the high level of educational participation and its marked increase over the past five years. The proportion of the 15-24 year-old population in the educational system rose from 50.1 per cent in 2006 to 60.5 per cent in 2011.  While not all of the additional years of schooling will be as productive as we would wish, being in the educational system is less wasteful than being unemployed.  This aspect of the adjustment to the present crisis is concealed by the conventional youth unemployment rate.

None the less, we cannot lose sight of the collapse of employment among the youth population.  In 2006 39.5 per cent of the population aged 15-24 was in employment.  By 2011 this percentage had fallen to 22.5.  Among those aged 20-24 the rate declined from 60.0 to 39.0.  While the youth unemployment crisis may not be as severe as suggested by the headline youth unemployment rate, it is a crisis.

Summit Statement

By Seamus Coffey

Friday, June 29th, 2012

The short statement from from the European Council summit held last night/this morning can be read here.  Some of the points of note:

  1. “When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.”
  2. “The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme.”
  3. “We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.”

UPDATE: I have provided some initial reaction to the summit here.

Systemic Banking Crises Database: An Update

By Seamus Coffey

Thursday, June 28th, 2012

A new IMF Working Paper by Luc Laeven and Fabián Valencia can be read here.  The authors look at the costliest banking crises in terms of fiscal costs, public debt and output losses.  The paragraph beginning on the bottom of page 19 is noteworthy.

Iceland and Ireland also feature among the ten costliest banking crises in terms of overall increase in public debt, with public debt in both cases increasing by more than 70 percent of GDP within four years. In terms of output losses, the ongoing crises in Ireland and Latvia are among the ten costliest banking crises since the 1970s, with output losses exceeding 100 percent in both cases. Ireland holds the undesirable position of being the only country currently undergoing a banking crisis that features among the top-ten of costliest banking crises along all three dimensions, making it the costliest banking crisis in advanced economies since at least the Great Depression. And the crisis in Ireland is still ongoing.

Krugman and Layard on a manifesto for economic sense

By Stephen Kinsella

Thursday, June 28th, 2012

Paul Krugman and Richard Layard put forward a case for a coherent and evidence based approach to the crisis. Essentially they argue that a strategy of focusing on the reduction of public debt levels exclusively in order to regain market confidence makes no sense, and has been falsified empirically. They also argue that structural imbalances shouldn’t prevent the use of discretionary fiscal policy for stabilization purposes when it is available.

This chart of the drop in domestic demand from the recent Nevin Institute quarterly report (page 4) is particularly striking as a motivating factor in discussing Krugman and Layard’s piece.

Final Domestic Demand

Krugman and Layard have a manifesto you can sign up to (I did).

There are lots of things in this piece I agree with, but two big ones are:

1. Placing the blame for the crisis at governments’ feet makes no sense. The crisis didn’t start in the public finances, it began in the private sector(s).
2. The confidence argument and its attendant strategy is completely wrong headed at this juncture, Ireland in particular shouldn’t be held up by anyone as the role model for austerity, either in the 1980s or today.

There are also aspects I don’t see as pertinent to the Irish case.

Krugman and Layard write:

A second argument against expanding demand is that output is in fact constrained on the supply side - by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations.

But in Ireland, in the IT sector for example, and especially in really high end tech jobs like online video gaming and such, they can’t get people. (Obviously in other sectors like services and construction their argument holds.) There are other examples but I think in a small open economy like Ireland this argument isn’t that important.

The key question from an Irish point of view is: to what extent is the Krugman-Layard prescription possible in a country with so little fiscal room for maneuver? Translating the argument down a bit, if Ireland is somewhere between Greece and Spain in terms of it’s problems, even if Enda Kenny et al bought the Krugman/Layard prescription lock stock and two smoking barrels, given where we are right now, are our options severely limited in any event? I’d welcome your thoughts on this.

Electricity & Gas Prices in Ireland

By Philip Lane

Wednesday, June 27th, 2012

SEAI has released the latest international comparative price data here.

The Future of Financial Globalisation

By Philip Lane

Wednesday, June 27th, 2012

The BIS Annual Conference took place last week - the papers are here.

My paper “Financial Globalisation and the Crisis” has some discussion of the Irish case.

NERI Q Reports

By Philip Lane

Wednesday, June 27th, 2012

QEO here; QEF here.

Towards a Genuine Economic and Monetary Union

By Seamus Coffey

Tuesday, June 26th, 2012

The report by the President of the European Council, Herman van Rompuy, can be read here.

Call for papers - conference on bank resolution mechanisms, Spring 2013

By Gregory Connor

Tuesday, June 26th, 2012

Call for Papers

Bank Resolution Mechanisms

A joint academic-practitioner conference with the theme Bank Resolution Mechanisms wil be held in Dublin, Ireland on Thursday May 23rd, 2013, organized by the Financial Mathematics and Computation Cluster (FMCC) at University College, Dublin and the Department of Economics, Finance & Accounting at National University of Ireland Maynooth. (more…)

European Commission Spring 2012 Review of Economic Adjustment Programme for Ireland

By Philip Lane

Tuesday, June 26th, 2012

Available here.

Turnover and Exports in Irish Pharma - guest post from Chris Van Egeraat

By Frank Barry

Monday, June 25th, 2012

Last week The Irish Times published their annual TOP 1000 Companies list. The list includes figures on, amongst others, turnover. A quick inspection of the list and CSO export data would suggest that exports of Irish pharmaceutical companies account for 248% of turnover!

The turnover figure I took from the TOP 100 list. I added Pfizer, which was missing from the hard copy but included in the on-line version. I excluded companies in Northern Ireland. I also excluded pharmacy groups and national distribution/sales companies on the basis that most of these will export little. I also excluded a small number of companies that were erroneously listed as pharmaceuticals. The turnover of the resulting list of firms adds up to €20.9bn.

CSO export figures suggest that in 2011, Ireland’s pharmaceutical exports stood at €51.8bn [pharmaceutical sector is here defined as to include organic chemicals (= mainly active ingredients), pharmaceutical preparations and essential oils].

I can’t figure out the problem. The issue cannot be explained by adding the turnover of the sub-1000 companies. The smallest Top 1000 company has a turnover of €6m. You would need a lot of small pharmaceutical companies to cover the difference.

I thought the difference could be explained by the fact that some pharmaceutical companies (e.g. Pfizer) operate separate export companies. But, the (separate) table with top financial enterprises includes no pharmaceutical companies. Still, could it be that exports of these export units are included in the Irish pharmaceutical export figures but not in the turnover of the Irish operations?

I appreciate that the Irish Times TOP 1000 list may not be perfect (Dell Ireland is reported to employ 796 Irish employees while the Dublin unit alone employs 1000 plus!) Still, the difference between the two figures seems too big to be explained away by recording errors. Any suggestions welcome

Below I include a selection of the methodological notes included on page 27:
• Where companies filed consolidated accounts, the group turnover was taken.
• The Irish subsidiaries of multinational or overseas companies are included if they are significant employers. If no financial information is available for the Irish operations, then turnover is estimated by The Irish Times on the basis of revenue per employee as per publicly available figures
• If a multinational has several subsidiaries in Ireland we have where possible treated them as one entity grouped under the main Irish company. In some circumstances this was not possible and they appear separately

Is the housing crash over?

By Stephen Kinsella

Monday, June 25th, 2012

Journalists are going to have a field day with the latest residential property data from the CSO. Prices in Dublin seem to have risen slightly. Overall, house prices in Dublin are 55% lower than at their peak in early 2007. See the graph below.

CSO.ie

From the report:

In the year to May, residential property prices at a national level, fell by 15.3%. This compares with an annual rate of decline of 16.4% in April and a decline of 12.2% recorded in the twelve months to May 2011.

Residential property prices grew by 0.2% in the month of May. This compares with a decline of 1.1% recorded in April and a decline of 1.2% recorded in May of last year.

It’s important to have more data before before every auctioneer/journalist/commentator in the country starts calling the bottom of the housing market. We’re only talking about a few months of semi-positive growth. I don’t want to take away from the data, but interpreting these data points as proof the worst is over is premature, given the scale of the year on year change (about a 15% drop).

Depfa Bank collapse and the Irish taxpayer

By Frank Barry

Monday, June 25th, 2012

There seems to be almost unanimous agreement within the Irish media that had the IFSC-based Depfa Bank not been bought by another German bank just before its collapse at the beginning of the financial crisis, the bill would have landed on the Irish taxpayer. Dan O’Brien repeats this view in an article in the Irish Times on Saturday.

I am not sure that the issue is as clearcut as is supposed. Willem Buiter (pages 9-11) suggests that we are in uncharted territory in these matters.

IMF Eurozone Concluding Mission Statement

By Kevin O’Rourke

Monday, June 25th, 2012

You can find it here. They usefully distinguish between short run and long run responses to the crisis, and correctly stress the need to maintain aggregate demand in the short run.

As for the long run reforms: if the euro survives, there will have to be “a broad-based dialogue about what a fuller fiscal union would imply for the sovereignty of member states and the accountability of the center,” and we may as well start thinking about these issues in Ireland now.

On the efficacy of internal devaluations: questions I would ask Zsolt Darvas in a seminar

By Kevin O’Rourke

Saturday, June 23rd, 2012

I notice that Philip’s last post has attracted very few comments, which is a shame, since the paper he linked to is a very important contribution to the debate, both here and in Europe, and deserves to be read widely. It is especially useful for people overseas seeking to draw lessons from the Irish experience, since it highlights the extent to which the Irish “good news story” is in fact a story about pharmaceuticals. Hence I hope Philip will forgive me if I make these comments “on the front page”, as it were.

Among the key findings are:

1. Wages declined only very slightly after the onset of the crisis here, and have since recovered. More generally, the European evidence is that wages are sticky downward.

2. The decline in unit labour costs in Ireland has been very modest once you take compositional effects into account (Figure 3, middle panel): they have been rising since 2010 and are now less than five percent lower than at the start of 2008. Indeed, for the economy as a whole they are back where they started (the previous statement was based on excluding agriculture, construction, real estate and the public service).

3. Despite 2, there has been a 14 percent depreciation of the Irish real exchange rate even taking compositional effects into account (once again, the index excludes agriculture, construction, real estate and the public service; including these the real depreciation is about half as big — Figure 3, right hand panel).

4. The Irish real exchange rate has been appreciating since 2010.

5. Peripheral adjustment has involved massive employment losses.

Here are some questions I have:

1. What happens when you calculate a composition-adjusted real exchange rate index for Ireland vis à vis other eurozone members only?

2. What happens if you include agriculture in the index? This is an important traded sector in the Irish context.

3. What happens if you do both 1 and 2?

4. One of the most striking graphs in the paper is Figure 2 on p. 6, which shows that while while manufacturing value added has risen by 30 percent since the start of 2008 (thanks to what happened in the pharmaceutical sector), gross production has only risen by 5 percent. Can we make further progress in understanding this discrepancy (there are some helpful suggestions in the paper), and what might this tell us about the movement in Irish unit labour costs and real exchange rates since the crisis began?

Update: Zsolt has kindly responded to my questions here.

Compositional effects on productivity, labour cost and export adjustments

By Philip Lane

Friday, June 22nd, 2012

Zsolt Darvas at Bruegel has a new paper on this topic - available here.

Ronan McCrea: EU reforms call for new approach to referendums

By John McHale

Friday, June 22nd, 2012

Ronan McCrea has an op-ed in today’s Irish Times that is worth debating.    His proposal:

If we are to avoid an endless series of referendums in the coming years, we will have to give the Government a degree of authority to agree to treaty changes that have not yet been agreed.

This would require a more general amendment to the Constitution, giving the State the right to participate in a fiscal and banking union. Such an approach would allow the State to sign up to the numerous amendments that are likely in the coming years if the euro is to be saved.

Given the seriousness of the implications of fiscal union for our political system, it would be desirable that there would be a further referendum at the end of the process. Once a fiscal and banking union is fully in place, then voters could decide by referendum whether they would like to be in or out of such an arrangement.

Often lost in the recent referendum debate was recognition that developing the necessary fiscal and banking integration to underpin the euro is a two-way process.   The countries most likely to be net contributors under strengthened risk-sharing arrangements will be reluctant to agree to those arrangements without credible assurances of mutual discipline.   Given the necessity of these arrangements, it is not enough to lambast Germany for not being willing to move fast enough.   The extent of the political challenge means that there is responsibility on all countries to make the necessary changes feasible.

Willem Buiter: Race to save the euro will follow “Grexit”

By John McHale

Thursday, June 21st, 2012

Willem Buiter provides another incisive analysis of the euro zone crisis is this FT article.

From the article:

The endgame for the euro area, if the political will to keep it alive is strong enough, is likely to be a 16-member area, with banking union and the minimal fiscal Europe necessary to operate a monetary union when there is no full fiscal union.

Minimal fiscal Europe will consist of a larger European Stability Mechanism, the permanent liquidity fund, and a sovereign debt restructuring mechanism (SDRM). The ESM will be given eligible counterparty status for repurchase agreements with the eurosystem, subject to joint and several guarantees by the euro area member states. There will be some ex-post mutualisation of sovereign debt. Sovereign debt restructuring through the SDRM will recur.

One question is whether vulnerable euro zone countries could ever hope to regain robust creditworthiness with the SDRM hanging over them.   Given the likely effects of threatened “bail ins”, it seems too early to give up on more ambitious efforts for ex-ante debt mutualisation along the lines of the German “wise men” proposal.  (Gavyn Davies provides a useful analysis of the proposal here.   This Bruegel blog post considers the less ambitious alternative of “eurobills”, which could be a stepping stone to more ambitious “eurobonds”.)

The Costs of Working in Ireland Again

By Aedín Doris

Wednesday, June 20th, 2012

(This is a joint post with Donal O’Neill (NUIM) and Frank Walsh (UCD))

Because of the media storm last week about the Tol et al. paper on working costs, myself and a few colleagues (separately) decided to read the paper to see what all the fuss was about. We are all labour economists, used to using data on individuals, households and firms to address questions relevant to public policy issues. Our assessment of the paper is below.

The basic approach of the paper is as follows: it uses Household Budget Survey (HBS) data to examine the consumption patterns of different types of households. HBS data is collected at the household, rather than the individual level so the analysis distinguishes between households whose chief earner is employed and those whose chief earner is not employed. In particular, it examines the consumption patterns of these two household types under four headings: transport, childcare, heat & light, and takeaway food. To the extent that the amount spent by these households differ, the difference is designated a cost of working.

(more…)

Bad political feedback loops

By Kevin O’Rourke

Wednesday, June 20th, 2012

Niamh Hardiman has a post here which echoes one of the most important points George Soros made in his Trento speech: current EU policies are amplifying anti-EU sentiment, which in turn makes it more difficult politically to move towards the tighter Eurozone integration that is economically required to save the Euro project; which in turn exacerbates the economic situation, and so on.

I have two brief comments.

The first is that this sort of negative feedback loop suggests the need for a “big bang” approach to policy reform in Europe: not some temporary liquidity fix that will give the system a little more rope to hang itself with, but a fundamental shift in the policy stance, which could change both the economic and the political dynamics.

The second is that we have got to stop referring to parties which are willing to go along with the current policy mix as “pro-European”, as if a party like Syriza is anti-European or anti-EU (it is clearly not). When Mrs Thatcher set about dismantling the social contract that had defined Britain for thirty years, this did not make her anti-British, and nor was Arthur Scargill anti-British when he tried to oppose her. People disagree, often fundamentally, about policies: that is what democracy is all about, and the moment that “Europe” is defined with any one set of policies, rather than with a framework for deciding policies collectively, it is (or ought to be) finished as a political project.

I conclude that what the EU needs right now is a loyal opposition, willing to provoke an almightily row in order to promote change. Step forward Mr Fabius?

Wyplosz: Germany cannot pay either

By Colm McCarthy

Wednesday, June 20th, 2012

Charles Wyplosz was one of many economists who thought the May 2010 deal for Greece was the start of the slippery slope. Here is his latest take on the crisis. 

http://www.voxeu.org/index.php?q=node/8117

Extension Needed on the Irish Banks Liquidity Target Date

By Gregory Connor

Tuesday, June 19th, 2012

In early 2009, the Irish domestic banks had three critical problems: insolvency, distress, and a liquidity crisis.  Only one of these problems, the liquidity crisis, was solved successfully at an acceptable cost, via ECB liquidity provision.  This massive liquidity provision was one key motivation for the Financial Measures Programme (FMP), which lays out a plan the banks must follow to become liquidity self-financing.  Now, through no fault of the Irish banks but because of the continuing financial crisis, the liquidity target plan in the FMP is looking much too optimistic and needs some adjustment. 

  • 1. The loan-to-deposits target date should be changed from 2013 to (end-of) 2015.
  • 2. The ECB should make clear that their liquidity assistance to Irish banks is for a longer period than originally envisioned.

Without these adjustments, the Irish domestic banks will be incentivised to continue to starve the domestic economy of credit over the next few years.

(more…)

Fostering Growth in Europe Now

By Philip Lane

Tuesday, June 19th, 2012

Bergljot Barkbu, Jesmin Rahman and Rodrigo Valdés provide some policy recommendations in this new IMF SDN here.

European Banking Union

By Philip Lane

Tuesday, June 19th, 2012

The FT Analysis page is devoted to the topic of European Banking Union today - read it here.

See also op-ed by Larry Summers on the euro crisis.

Will Germany blink?

By Frank Barry

Monday, June 18th, 2012

Wolfgang Munchau writes in the FT that Chancellor Merkel has rejected any proposal that might actually resolve the eurozone crisis. He notes the incentives for Spain, Greece and Italy to default and exit.

Seminars, Today and Tomorrow

By Philip Lane

Monday, June 18th, 2012

Two interesting events at the ESRI:

ESRI Seminar: “Macro-Prudential Policy and Credit: the Right Question but the Wrong Answer
Speaker: Ray Barrell (Brunel)
Venue: The ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2
Date: 18/06/2012
Time: 4 pm

Joint ESRI/IIIS TCD Lecture “Globalisation, Growth Strategies and the Financial Crisis
Speaker: Arvind Virmani
Venue: The ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2
Date: 19/06/2012
Time: 4 pm

Germany, Greece and the Marshall Plan

By Philip Lane

Saturday, June 16th, 2012

Albert Ritschl has written a very informative response to the NYT op-ed by Hans-Werner Sinn in this Free Exchange post.  (See also Karl’s post here.)

A while back (in pre-crisis days), Tim Guinnane wrote a nice paper on the 1953 London Debt Agreement - available here.

Seamus McGuinness and Philip O’Connell: The Costs of Working in Ireland

By Philip Lane

Saturday, June 16th, 2012

Seamus McGuinness and Philip O’Connell provide a critique of the estimates of Crilly, Pentecost and Tol in this note.

IMF Sixth Review

By Seamus Coffey

Friday, June 15th, 2012

The IMF’s Sixth Review of the Extended Arrangement with Ireland can be read here.

The ECB and Its Watchers

By Philip Lane

Friday, June 15th, 2012

This annual event sees various ECB analysts from academia and the private sector interact with ECB officials.

The programme is here, with various presentations available for download.