Liam Delaney draws on the policy evalutation literature to offer an agenda for the reform of training and education policies (article here). Among the topics: the nature of required traning; the graduate unemployment problem; the importance of early childhood and lifelong learning; and the scarring effects of unemployment.
Author: John McHale
Philip O’Connell 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 Ireland’s 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 IMF’s 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.
The Irish Times begins a week-long series today on Ireland’s jobs crisis. First up is a wide-ranging article by John Martin, Director for Employment, Labour and Social Policies at the OECD. The other contributors will be Philip O’Connell (ALMPs), Liam Delaney (training polices), Brian Nolan (welfare system-employment interactions), with a concluding article on Friday by Dan O’Brien. There is also an editorial today that criticises the government’s lack of attention to employment-related policies.
High unemployment levels are causing growing hardship to families and individuals, requiring extensive State borrowing to fund social welfare payments and causing long-term damage to the very fabric of society. In these circumstances, schemes for retraining and job creation should top the political agenda.
But the Government appears transfixed by the banking crisis and the need to reassure bond markets.
This blog has also come in for (mostly justified) criticism in giving too little attention to the unemployment problem. A partial defence is that effectively dealing with the banking and fiscal crises is very much part of the policy response to the recession to limit its human cost. Hopefully, the series will spur debate on more direct policies to limit the rise in unemployment.
Apologies for what Paul Krugman would call a “wonkish” post.
As we enter some critical weeks for Irish fiscal policy, there is still wide disagreement about the nature of the creditworthiness-demand trade-off facing the government. At one of the spectrum are those who think Ireland is placed to have an “expansionary fiscal contraction”: a cut in the discretionary deficit would raise confidence and lower the risk preimum sufficiently so that we could simultaneously improve creditworthiness and demand. At the other end are those who think that discretionary cuts will slow the economy so much that the actual deficit will rise, leading to both a shrunken economy and shrunken creditworthiness. I think I share with most economists the view that we are actually in the boring middle – deficit cuts will slow the economy but will improve creditworthiness.
Readers might find this graphical representation of the trade-off useful in putting the different views in context. It attempts to capture the potentially complex relationship between creditworthiness and demand, allowing for different trade-offs over different ranges. (The “dismal” vicinity around point C has been subject to notable discussion on this blog, where the government is seen as effectively powerless to avoid bailout or default. At least this is how I interpret commenters such as Simpleton, Paul Hunt and Tull Macadoo, though I’m sure they will correct me if I’m wrong.)
While there has been much comment about the four-year fiscal plan since the government announced it last month, it is still not clear what sort of plan they have in mind. At one end of spectrum (the relatively useless end) would be new targets for current spending, capital spending and tax revenues, with possibly a listing of “realistic options” for achieving those targets. At the other end of the spectrum would be a true multi-year budget, with detailed phased measures that are legislated where possible.
The government’s statement yesterday hardly suggests that a proper multi-year budget is what they have in mind:
The purpose of the Four Year Plan for Budgets and Economic Growth is to chart a credible way forward for this country. The size of the adjustment for 2011 and the distribution over the remaining years will be announced in the Four Year Plan. The Plan will contain targets for growth and strategies for the achievement of those targets.
When exactly did the four-year plan become a plan for economic growth? While returning the economy to growth is a critical part of the overall challenge, the four-year plan had a specific and urgent goal: to convince potential buyers of Irish debt that Ireland could lower its borrowing requirement sufficiently to avoid a bailout or default. Of course, decent economic growth will make this challenge easier, but I can’t see how the “year-by-year, sector-by-sector” fiscal plan expected by the EU Commission is the place for growth targets and strategies. We have to worry that the “targets and strategies” are filler to distract from the paucity of the fiscal plan itself.
Minister Lenihan also confirmed yesterday a nominal cumulative deficit adjustment target of €15 billion by 2014. The debate has now switched to how much to front–load this adjustment in 2011. Of course, the necessary front-loading depends on the credibility of the overall plan. The more investors have doubts that we can make good on our promises, the more they will need to see the money taken out up front – that is, the more the adjustment must be inefficiently concentrated at the time when our anticipated output and employment gaps are at their largest. Having to front–load because the government (and opposition) can’t or won’t deliver a true multi-year plan would be a serious policy failure.