Responding to the Jobs Crisis: Dan O’Brien Sums Up

Dan O’Brien concludes the excellent Irish Times series on policies to tackle the jobs and unemployment crisis (article here).   He makes substantiive proposals in each of the areas focused on over the week: activation, training, and the benefits system.   Interestingly he calls for a small focused team with appropriate expertise to examine blueprints for a more effective policy regime.

Putting together a joined-up jobs policy is a big task, but blueprints are available from other small northern Europe countries. A three-person team with a remit to report on policy in three months could do this. It would require a labour market expert, an organisational change specialist and a capable former civil servant who knows the system.

The two papers referenced in the article are available here (Grubb et al (2009), “Activation Policies in Ireland”) and here (Forfas, 2010, “Review of Labour Market Programmes”).

Responding to the Jobs Crisis: Brian Nolan on Social Welfare, Employment and Unemployment

Brian Nolan addresses interactions between the benefits system and unemployment in the fourth part of the Irish Times Jobs Crisis series (article here).   Among the topics: unemployment traps due to high overall replacement rates; the relative importance of labour demand and supply factors in the rise in unemployment; the (limited) need to adjust social welfare benefits in line with changes in other incomes; and the importance of providing meaningful work opportunties as part of soical employment/benefit conditionality schemes.

Responding to the Jobs Crisis: Liam Delaney on Training

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.

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.

Irish Times Series on the Jobs Crisis

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.