Unemployment not a necessity

The Director of the Nevin Economic Research Institute, Tom Healy suggests that effective social policies can make full employment a possibility.

The level and quality of employment together with the distribution of skills is central to productivity. Full employment is possible provided that public policy is directed to this as an overriding priority. When some economists speak of a ‘natural rate of unemployment’ they betray an underlying prejudice – not based on historical evidence – that a particular rate of unemployment is somehow ‘natural’ because it is unavoidable due to reasons of timing in job search or long-term structural industrial change that renders many jobs redundant due to technology, trade, etc. However, for much of the period 1945-1970 many Western European economies recorded exceptionally low rates of unemployment – well below the 5 per cent threshold arbitrarily regarded by some economists nowadays as consistent with ‘full employment’.

A full-employment target is needed to complement the ‘inflation target’ much beloved of central banks across the world. However, measuring price inflation is one thing; measuring ‘full employment’ is another. ‘Full employment’ is only very approximately measured with reference to the unemployment rate. Extensive pockets of underemployment, non-standard employment arrangements including casual, zero-hours or ‘if-and-when’ contracts and involuntary part-time work make it difficult for statisticians to measure the overall slack in the labour market. However, based on official labour market statistics we know that underemployment is, typically, at least twice the standard unemployment rate.

The Irish labour market experience was and is special. It provides an example of how supply and demand for labour is regulated by cross-country migrant flows. Historically, the UK labour market absorbed excess Irish labour supply during periods of stagnation or depression such as happened in the 1950s or to a lesser extent in the 1980s and in the most recent downturn of 2008-2012. An altogether new development emerged in the second half of the ‘Celtic Tiger’ when excess demand for labour in particular sectors and occupations helped drive high levels of inward migration. In spite of high levels of outward migration in the subsequent economic crash the total gross inward flow of migrants remained high compared to what it was before the Celtic Tiger.

Underemployment

The rate of unemployment is defined as the proportion of the total labour force (those at work or available for work and actively seeing work) that is unemployed at a given moment in time. The rate peaked at 17 per cent in 1987 before falling to less than 5 per cent in the early 2000s while it reached 15 per cent in 2012. Were it not for outward migration the rate might have reached something closer to 20 per cent of the labour force in 2012. Thankfully the rate has dropped significantly from its high of 15 per cent in early 2012 to under 9 per cent in recent times. Yet, the rate remains too high and there is ample evidence of significant ‘underemployment’ when part-time and discouraged workers are included in a measure of overall underemployment. One estimate of underemployment published by the Central Statistics Office shows a figure of 16 per cent of the potential labour force at the end of 2015 down from 26 per cent in early 2012 (that is, the percentage of the total potential labour force that is unemployed or underemployed but would like to work or work more hours).

Clearly, this level of underemployment taken together with a large number of involuntary emigrants since 2008 is unacceptable and wasteful. The extent of slack in the labour market is still far too large and leaves workers vulnerable were there to be another global shock or sharp domestic downturn – something that is unlikely in the immediate period ahead but not to be ruled out in the coming years.

Turning to a more positive perspective on the statistics an important indicator of employment performance is the total employment rate. This is the proportion of the ‘working age population’ (for convenience defined as persons aged 20-64) that is in employment whether full-time or part-time in a recent week at the time of the survey.

Female participation

The total employment rate, in the Republic of Ireland, remains below the EU average reflecting a shortfall in female participation. Female participation rose rapidly in the Republic of Ireland throughout the boom years but took a hit during the last recession. It has not recovered since then in spite of an improved rate for males. The overall rate is still well below that in many other small, open Northern European countries with whom a comparison is appropriate. The reasons for this gap are varied including a lack of affordable and accessible childcare.

‘Making work pay’ has become a popular technocratic and political catch-phrase across Europe. The complexities surrounding family life, wage income, social transfers, housing benefit and other social goods dependent on family income and circumstances make it difficult to address the matter from the point of view of empirical evidence. However, work by the OECD, the ESRI and my colleague at the NERI, Micheál Collins does not reveal, in the case of the Republic of Ireland, a situation of widespread or systematic ‘disincentive’ to work based on existing social welfare payments and other entitlements. This is particularly so in the case of single adults.

The overall employment rate provides a useful summary of the capacity of a society to tackle underemployment as well as provide sufficient resources to meet demand for public services and income in retirement. However, we should be concerned not just about the total employment rate but the quality, intensity and productivity of all employment. Here, the story is mixed with some areas of employment growth lending themselves to precarious, low-paid and under-utilised skilled labour.

A sustainable and balanced recovery in employment calls for a careful coordination of social policies to enable men and women to participate in the labour market in ways that makes the best use of skills and contribute to the community.