The Irish Economy

In a statement issued at the end of this Review yesterday, we were given the by-now familiar plaudits for achieving various benchmarks. Going forward, ’strict implementation’ of this year’s budgetary targets is urged.

The gravity of the unemployment situation is acknowledged. ‘Swift action needed to deal with unemployment’ the newspaper headlines proclaimed. The onus for this is placed on the Irish government and a familiar list of policies proposed, including for example ‘the need for enhanced engagement with the unemployed and the opening up of competition in sheltered sectors like legal services’.

I wonder how much our readers think increased competition between lawyers will contribute to lowering our unemployment rate.

Last week the latest ESRI Quarterly Economic Commentary was published. It includes 5 research notes including one by myself on the regional dimension of the unemployment crisis.

While there is a lot of discussion about unemployment, the differences across regions have not received much attention. The note shows that the differences are significant. It also shows that things would look a lot worse if it had not been for a drop in labour force participation - in the Border region the unemployment rate could have reached 27%. Not surprisingly a sharp drop in employment is the major cause of the increase in unemployment, but a look at the sectoral breakdown of employment changes gives some interesting results. Firstly, construction employment appears to have contracted quite uniformly across the country. Secondly, employment in education and health actually grew. Thirdly, there are some interesting differences across the regions with respect to other sectors. For example, manufacturing declined much more in Dublin than elsewhere. Most importantly the analysis suggests that the underlying factors that are responsible for the differences in unemployment rates across the regions are very persistent but were hidden during the boom. You can expect some more analysis on this in the near future.

The other notes are:
Tax and Taxable Capacity: Ireland in Comparative Perspective
Comparing Public and Private Sector Pay in Ireland: Size Matters
Trends in Consumption since the Crisis
Revisions to Population, Migration and the Labour Force, 2007-2011

Just like a year ago, we are hearing a lot of guff about how the euro crisis is over, and just like a year ago the people I talk to in Brussels are becoming increasingly alarmed by the complacency of the European establishment. It does seem as though the only thing that makes Europe’s useless political class worry is the risk of imminent cardiac arrest, as proxied by bond yields and the like; but the cancer of unemployment will do just as much damage if allowed to progress unchecked.

Here are the latest Eurozone unemployment statistics. Just because we are becoming used to this sort of news does not mean that they are even remotely acceptable. They are grim.

There are certain costs that are obviously not worth paying to keep the EMU experiment going. One is a dilution of the continent’s democratic traditions. Another is unemployment rates of the sort we are seeing in Spain and Greece. No doubt crocodile tears will be shed by supporters of status quo macroeconomic policies, but such responses are no longer acceptable. EMU supporters, and €-sceptics who are worried about the costs of an EMU break-up, now have to start being very concrete in terms of proposing Eurozone economic policies, including short run monetary and fiscal policies, that can start reversing these trends in 2013. (A group of us tried to do so here, for example.) And then we need to see such policies being implemented, quickly.

You have to live through times like this to really appreciate the wisdom of Keynes’ famous line about the long run.

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 24^th, 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 ratio doubled, the rate rose by 150 per cent.  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.

The CSO press release on the latest Irish employment and unemployment statistics is here. They are pretty terrible.

As Colm has frequently pointed out, it is very difficult to credibly ask for a new deal on bank-related debt when you are simultaneously telling the people in charge in Brussels and Frankfurt how well we are doing (i.e. how successfully their strategy has been working in Ireland).

Perhaps it’s time to ignore Johnny Mercer and start accentuating the negative, even at the risk of a little pandemonium?

Via the excellent Flowing data, an interesting free guidebook: the Data Journalism Handbook.

Worth a look, including for the link to a rather good interactive data visualisation from the New York Times of 2009 “The Jobless Rate for People Like You“.

The news that Spanish unemployment is now at 24.4% deserves a thread. It is the latest reminder of the complete and utter failure of the Eurozone’s absurd strategy of generalized, undifferentiated austerity for all, simultaneously. What is so frustrating is that it was obvious in 2010 that this would be the result, which is why some of us objected at the time to what was happening: you didn’t have to be a genius to figure it out. I don’t see any way that the Eurozone will survive in its current form unless the macroeconomic policy mix changes, and I’m not sure it will change, even if M Hollande gets elected.

The “2012 Action plan for jobs” is now available on the DJEI website. The press release is here

Stephen Collins reports that ‘project champions’ and their teams will be given large tax breaks to incentivize them to come to Ireland to set up projects that entail ‘new product development’.

Is this a good idea? Anyone know of any empirical evidence on the effectiveness of these types of tax breaks (assuming that they exist elsewhere)?

Below are links to the unemployment session materials so that this thread can be used for thoughts people have on the contents of the session.

“So, we hear Ireland is recovering”, a French friend said to me last night.

(Mind you, they said something similar in the summer of 2010. Our government has an incentive to sell the Irish good news story, and “Europe” has an incentive to buy it.)

So, here are the latest employment data, reporting the largest seasonally adjusted quarterly fall in employment in two years, and which surely deserve a thread of their own.

… happy!

So I thought I would share my thoughts on how the Irish are faring on this front.

I did a video session on Irishdebate.com yesterday on unemployment. It is available here A blogpost with various links to material discussed during the session is here The session went through: the extent of unemployment in Ireland; consequences of long-run unemployment; current government responses; and potential responses.

The format is an interesting one and worth thinking about for others here as it gives more time to work through topics than is usually possible on television and radio. Joe Garde on Irishdebate.com sets them up. Ronan Lyons, Stephen Kinsella and others have done sessions on it so far.

To Paul Krugman’s recent posts on Ireland and the Baltics, I would add two points.

1. Ireland’s quarterly GDP data are notoriously volatile.

2. Ireland is a small, open economy, and it is by common consent a relatively flexible economy. It is also an economy in which labour is both inwardly and outwardly mobile. And yet unemployment here is now running at 14.5%. So do we really think that the Irish experience can be used to argue that the austerity/internal devaluation medicine is appropriate for countries like Greece or Italy?

It would be wrong not to have a thread on the latest unemployment and emigration data.

Together with the recent data on our consumer price level, relative to the rest of the EU, they show (as if there were any doubt on the matter) that even in small, open, flexible Ireland, the current poster boy for the EU’s preferred austerity/internal devaluation strategy, wage and price flexibility — while impressive — isn’t what certain macro theories assume it to be.

The QNHS release is here.   Some analysis of the figures from the Irish Times here.  Overall, some modest good news.   I would say Ronnie O’Toole has it about right,

“This does not indicate that unemployment is on a downward path, and only reverses the surprise rise in the fourth quarter,” said National Irish Bank’s chief economist Dr Ronnie O’Toole.

“However, it does indicate that the labour market is very close to stabilising, with half of all industry categories showing year-on-year increases in employment. These increases, however, were not large enough to offset the continued loss of jobs in hospitality and construction.”

These are really awful numbers (H/T Eurointelligence).

The IBEC submission for next weeks “jobs budget” is available at this link. Details include suggestions on extra data collection, changes to the FIS scheme, national internship programmes, sectoral-specific recommendations in areas like energy and farming, change to bankruptcy laws and a loan guarantee scheme.

The Live Register figures for March are out.

The standardised unemployment rate in March was 14.7%, unchanged from February. This compares with the latest seasonally adjusted unemployment rate of 14.7% from the Quarterly National Household Survey in the fourth quarter of 2010, and an annual average of 13.6% for 2010.

By way of comparison, the baseline forecast for 2011 unemployment in the Central Bank’s PCAR macroeconomic scenario is 13.4%. In the adverse scenario, this rises to 14.9%. We are almost there, and it is only March.

At least the Central Bank scenarios got the 2010 unemployment numbers right! This contrasts with their 2010 GDP numbers, as Dan O’Brien pointed out earlier in the week.

(And I admit that I am baffled by an adverse house price scenario that is not robust to the ‘What if Morgan Kelly is right?’ objection.)