Download Unemployment Trends in Ireland, 1997-2002

Unemployment Trends
in Ireland, 1997-2002
1/2002 FÁS Labour Market Update
Brian McCormick,
Planning & Research Department
November 2002
Executive Summary
This paper looks at unemployment trends in Ireland over the last 5 years
and considers the most likely future developments in unemployment over
the short-term. Below are the main conclusions arising from the analysis:
• The fall in unemployment over the 1997-2001 period did not
discriminate significantly on the basis of age or sex. On the other
hand, the rise in unemployment during 2001-2002 has shown a
noticeable age and gender bias with young males the worst affected.
• The analysis suggests that the reduction in unemployment during the
1997-2001 period was both cyclical (due to strong economic growth)
and structural (due to employment-friendly policies such as lower
income tax rates). The recent rise in unemployment, on the other
hand, would seem to be of a cyclical nature.
• All the indicators are that unemployment will continue to rise in the
short-term.
• A more flexible approach to national wage bargaining will help lessen
cyclical unemployment in the future.
• There is a real danger that cyclical unemployment will turn into
structural unemployment if appropriate interventions are not in place
to re-skill those who become unemployed during the downturn.
2
Introduction
This paper looks at unemployment trends in Ireland over the last 5 years
drawing mainly on unemployment statistics contained in the Quarterly
National Household Survey (QNHS)1. The paper is divided into five
sections. Section 1 looks at unemployment trends during the 1997-2001
period when unemployment fell by almost 100,000. Section 2 analyses
the more recent upward trend in unemployment over the last 12 months.
Section 3 attempts to account for these trends. Section 4 considers the
most likely short-term developments in unemployment. Section 5
concludes.
1997-2001
Overall unemployment fell by 6.4 percentage points over the 1997-2001
period, down from 10.4 per cent in 1997 to only 4 per cent in 2001. As
can be seen from Figure 1, most of the reduction in unemployment
occurred between 1997 and 1999. The reduction in unemployment was
much more marked than in the Euro Zone where the unemployment rate
experienced a more modest reduction from 11.5% to 8.3%. In fact, such
was the dramatic fall in Irish unemployment over this period that the
number of long-term unemployed in the fourth quarter of 1997 (90,200)
was larger than the total unemployed (both short and long-term) in the
fourth quarter of 2001 (72,600).
1
The QNHS measures unemployment according to the ILO classification which defines a person as
unemployed if they were without work and available for work in the week before the survey and had
taken specific steps, in the preceding four weeks, to find work.
3
000s
Figure 1: Unemployment 1997-2001
200
180
160
140
120
100
80
60
40
20
0
1997Q4
1999Q4
2001Q4
Source: CSO, QNHS various issues
As can be seen from Table 1, the majority of the reduction in
unemployment over the 1997-2001 period was accounted for by the
decline in long-term unemployment, with the long-term unemployment
rate falling from 5.5 per cent to only 1.2 per cent.
Table 1: Change in Unemployment 1997-2001
1997 Q4
2001 Q4
Change
Short-Term Long-Term
4.9
5.5
2.8
1.2
-2.1
-4.3
Total
10.4
4.0
-6.4
Long-term unemployment can fall either because the long-term
unemployed are exiting (to employment or from the labour force) or
because the short-term unemployed are exiting before they become longterm unemployed. Basing his analysis on duration data from the Live
4
Register2, O’Connell (2002) suggests that the decline in long-term
unemployment was due both:
“to a reduction in the inflow to long-term unemployment and an increase
in the exit rate. The reduction in the inflow to long-term unemployment is
a function of both reduced inflow to short-term unemployment (i.e.
declining numbers of short-term unemployed) and a steady reduction in
the exit rate from short to long-term unemployment.” 3
O’Connell notes, however, that while long-term unemployment has
decreased dramatically, those who became long-term unemployed still
found it much harder than the short-term unemployed to (re-) enter
employment. This is borne out by the fact that the survival rate for the
long-term unemployed is still much higher than for the short-term
unemployed. The survival rate is the percentage of unemployed persons
who remain unemployed throughout a given period (12 months in this
case). Live Register data for 2000-2001 shows that the survival rate for
the short-term unemployed was 15%, considerably less than the survival
rates of 43% and 56% for those who had been unemployed for either 1-2
years or for more than 2 years respectively.
The reduction in unemployment during the 1997-2001 period impacted
significantly on all age groups of both sexes as can be seen by Figures 23. As noted above, the majority of the reduction in unemployment took
place during the 1997-99 period. The 1999-2001 period saw only modest
2
The Live Register is not designed to measure of unemployment. It includes part-time workers (those
who work up to three days a week), seasonal and causual workers entitled to Unemployment
Assistance or Unemployment Benefit.
3
O’Connell, P.J., “Employability”, in Impact Evaluation of the European Employment Strategy in
Ireland, 2002.
5
reductions in unemployment for females across all age groups and for
young and older males. Only “middle-aged” males (the 35-54 age group)
experienced a noticeable reduction in unemployment over the last two
years of the boom4. Male unemployment in the 15-34 age group saw
virtually no change with 27,300 unemployed in 1999 quarter 4 and
27,200 unemployed in 2001 quarter 4. However, these figures hide the
fact that unemployment for 15-34 year old males had fallen to 21,600 by
2000 quarter 4 before rising to 27,200 in quarter 4 2001.
Figure 2: Female Unemployment by Age
1997 Q4 - 2001 Q4
20
1997 Q4
1999 Q4
2001 Q4
18
16
000s
14
12
10
8
6
4
2
0
15-19
20-24
25-34
35-44
45-54
Source: CSO, QNHS various issues
4
Interestingly, the National Employment Action Plan Process of pro-active intervention was extended
in February 2000 to include the 35-54 age group.
6
Figure 3: Male Unemployment by Age 1997 Q4 - 2001 Q4
30
1997 Q4
1999Q4
2001 Q4
25
000s
20
15
10
5
0
15-19
20-24
25-34
35-44
45-54
55-59
Source: CSO, QNHS various issues
2001-2002
The fall in unemployment bottomed out in the first half of 2001 when the
unemployment rate reached a low of 3.7% (65,400) in the second quarter
of 2001. Over the subsequent 12 months, unemployment rose by 11,800
to 77,200 (4.2%) in the second quarter of 2002. Nearly all the rise in
unemployment was accounted for by a 10,900 increase in the number of
short-term unemployed5.
Who are these recently unemployed? Unlike 1997-2001 when outflows
from unemployment aggregated over the period were largely gender and
age neutral, there has been a significant age and gender bias in recent
inflows into unemployment. The younger members of the labour force
have been hit worst by the recent downturn. This is most striking among
5
When overall unemployment rises it is almost a statistical inevitability that there will be a
corresponding rise in short-term unemployment.
7
the 20-24 age group who accounted for 28% of the increase in
unemployment, despite making up only 13% of the labour force. More
generally, the under-35 age group who represent 46% of the labour force,
accounted for 85% of the increase in unemployment (see figure 4).
Figure 4: Share of Unemployment Increase for 20012002 by Age and Sex
90%
Female
80%
Male
70%
Share
60%
50%
40%
30%
20%
10%
0%
15-34
35-64
Age
Source: CSO, QNHS 2002 Q2.
Turning to the gender breakdown, it is clear that males have fared worst
in the recent slowdown, accounting for 9,000 of the increase in
unemployment compared to the 2,700 accounted for by females. The
number of males who have begun signing on the Live Register has also
increased dramatically. Over the 12 months to April 2002 the number of
males signing on for less than a year rose by almost 18,600, three times
greater than the corresponding rise of 6,500 for females.
While unemployment data is not available by sector, the Department of
Enterprise, Trade and Employment (DETE) does supply monthly figures
8
for notified statutory redundancies6 broken down by sector. The overall
figure shows that there were 19,800 notified redundancies in 2001 up
49% on the year 2000 figure of 13,300. This trend has continued into
2002 with redundancies to the end of October totalling 21,000, up 33%
on the same period last year. In 2001 the metals and engineering, and
business and financial services, sectors experienced the largest numerical
rises in redundancy notifications (2,300 and 1,700 respectively). A
significant proportion of the metals and engineering sector is accounted
for by hi-tech computer and electronics companies. The redundancy data
does not reveal to what extent these job losses can be accounted for in
terms of public or private sector lay offs. However, given that the
majority of job creation was in the public sector in the last 12 months, it
is most likely that the private sector was the main source of these recent
job losses.
Cyclical and Structural Trends
Economists breakdown unemployment into 3 main types, namely
frictional,
cyclical
and
structural
unemployment.
Frictional
unemployment occurs during the period that a worker switches from one
job to another. Cyclical trends in unemployment are driven by short-run
changes in economic output around the long-run trend. Structural trends
in unemployment reflect changes??? in the working of labour (and
product) markets in areas such as:
“taxation on labour, skills mismatch, geographical and occupational
6
While redundancy figures are a reasonable indicator of unemployment trends, they tend to understate
the number of overall redundancies as they only concern redundancies that qualify for redundancy
payments.
9
mobility in the labour market, the relative generosity of the treatment of
unemployed people, measures such as active labour market policies taken
to prevent short run increases in unemployment becoming structural in
nature, the degree of competition faced by producers in their relative
markets and the long-term real interest rates.”7
Recently the EU Commission has attempted to decompose the fall in
Euro Zone unemployment into its cyclical and structural components8.
The EU Commission estimated that approximately half (1.4 percentage
points) of the reduction in Euro Zone unemployment over the 1997-2001
period could be attributed to a fall in the structural component of
unemployment. Put another way, the Non-Accelerating Inflation Rate of
Unemployment (the NAIRU)9 in the Euro Zone is estimated to have
fallen by 1.4 percentage points from 10.4% in 1997 to 9% in 2001. The
remaining
1.6
percentage
point
reduction
in
the
Euro
Zone
unemployment rate can be attributed to the fall in the cyclical component
resulting from a short-run fluctuation in economic output above the longrun trend. Reductions in both the cyclical and structural components of
unemployment tend to be mutually reinforcing as a reduction in cyclical
unemployment will provide more revenue to finance structural
improvements while a reduction in structural unemployment should in
turn
increase
economic
activity
and
thereby
reduce
cyclical
unemployment.
As mentioned earlier, unemployment in Ireland fell much more rapidly
7
European Commission, “Structural changes in the European Labour Market”, Impact of the EES,
2002.
8
EU Commission , “The cyclical behaviour of unemployment” in European Economy, Spring 2002
9
This is the unemployment rate consistent with a non-accelerating rate of inflation. Mainstream
economic theory postulates a short-run trade off between unemployment and inflation such that
10
over the 1997-2001 period compared to the rest of the Euro Zone. Since
Ireland’s economic growth rate over the 1997-2001 period was
significantly above the 5% long-term sustainable growth rate postulated
by the ESRI10, a lot of the reduction in Irish unemployment is probably
due to a reduction in the cyclical component. However, there also seems
to have been a significant downward movement in the extent of structural
unemployment, given that the European Commission has estimated that
the Irish NAIRU fell by 3 percentage points during the 1997-2001 period.
The only EU country to enjoy a larger reduction was Spain where the
NAIRU is estimated to have fallen by 6 percentage points (see figure 5)11.
U
en K
m
ar
Fr k
N
et anc
he e
rla
n
Sw ds
ed
e
Ire n
la
nd
Sp
ai
n
D
It
Be aly
lg
iu
Fi m
nl
a
Po nd
rtu
ga
l
EU
7
6
5
4
3
2
1
0
-1
-2
G
Lu re
xe ec
m e
bo
ur
Au g
s
G tria
er
m
an
y
% Points
Figure 5: Reduction in NAIRU 1997-2001 by EU Member
States
Source: European Commission
One possible reason for the apparent decline in structural unemployment
may be the fall in recent years in the proportion of the unemployed who
face high replacement rates. A high replacement rate for an unemployed
person indicates that they would not be much better off financially (and
could even be worse off if the rate is over 100%) if they were working.
lowering unemployment beyond a certain point (the NAIRU) can only be achieved at the expense of
higher inflation.
10
ESRI, Medium-Term Review, 2001-2007.
11
Callan and Keeney (2002)12 estimate that the number of unemployed
facing replacement rates above 70% fell from 21.1% in 1998 to only
14.1% in 2002. The reduction in the replacement rate has mainly been
due to a combination of tax reductions on low incomes, the introduction
of the minimum wage, and earnings rising at a faster rate than meanstested social welfare payments. In fact over the 1997-2001 period, of all
the EU countries, Ireland has seen the most significant reduction (-7.7
percentage points) in the tax wedge for low income earners (where low
income is defined as 67% of the average production worker’s wage
level)13.
Another possible factor for the apparent decline in structural
unemployment may be the increased geographic and occupational
mobility of a more youthful labour force. It may also be argued that the
introduction of activation measures under the National Employment
Action Plan designed to stem the flow of the short-term unemployed into
long-term unemployment was a further contributory factor14. On the
broader macroeconomic front, the low interest rate environment arising
from joining the EMU in 1999 may also have helped lower structural
unemployment over the 1997-2001 period.
Given the current economic slowdown it seems reasonable to assume that
the recent rise in unemployment has largely been due to a short-run
cyclical decline in output below the long-run trend. It is hard to see any
basis for attributing much of the unemployment rise to structural effects
11
EU Commission , “The cyclical behaviour of unemployment” in European Economy, Spring 2002
Callan, T. and M.Keeney, “Taxes, Benefits and the Financial Incentive to Work: Evolution and
Policy Impacts” in Impact Evaluation of the European Employment Strategy in Ireland, 2002.
13
European Commission, “Tax-benefit Reforms and Taxation on Labour”, Impact Evaluation of the
EES, 2002
12
12
given that none of the structural factors listed in the European
Commission definition (see above) would seem to have deteriorated over
the 18 months.
It usually takes time before cyclical fluctuations in economic activity
show up in unemployment data, reflecting a tendency by firms to hold
onto employees during the early stages of a downturn15. Unemployment
data is therefore of limited use in identifying turning points in economic
cycles. Sexton (2002), using a range of indicators, estimates that the Irish
economy began to weaken considerably as early as the first quarter of
200116. Technically, unemployment data showed the first signs of a
cyclical unemployment response in the second quarter of 2001, when a
modest rise of 0.1 percentage points in the seasonally adjusted
unemployment rate occurred. However, it was not until the fourth quarter
of 2001, when the unemployment rate rose by 0.3 percentage points, that
a more clear-cut cyclical response could be identified.
While the QNHS data suggests a 3-9 month lag in the response rate of
unemployment, figures for notified redundancies show a marked rise in
April 2001, approximately the same time as the onset of the economic
downturn. As Sexton notes, data on redundancies tend to show up
changes in economic cycles earlier than national unemployment data
because statutory redundancies usually require one to two months
advance notification. The usefulness of redundancy data as an early
indicator of cyclical unemployment might also be due to the fact they are
14
O’Connell, P.J., “Employability”, in Impact Evaluation of the European Employment Strategy in
Ireland, 2002.
15
Central Bank, Summer Bulletin, 2002
16
Sexton, J.J., “Interpreting Recent Developments in the Economy and Labour Market”, Quarterly
Economic Commentary, ESRI, 2002.
13
gross rather than net figures, and therefore rising unemployment in one
sector is not obscured by increased recruitment in another sector.
The Future
Will the recent increase in unemployment continue in the short-term? All
the indicators would seem to suggest that this will be the case. Given that
GDP in 2002 is expected to grow by less than the economy’s projected
medium-term sustainable growth rate of 5%17, the cyclical component of
unemployment is likely to increase further. In fact, the cyclical
unemployment response could be more pronounced than has previously
been the case as membership of the EMU system removes the possibility
of a counter-cyclical adjustment of exchange rates18 (Feldstein 2000)19. It
is also significant that the output growth recorded in the first half of 2002
has primarily been in the non-labour-intensive foreign-owned chemical
export sector.
The European Commission maintains that during the 1990s those who
became unemployed were less likely to leave the labour market than had
been the case in the 1980s. If this trend continues, and participation rates
do not adjust downwards in response to the current downturn, then the
increase in cyclical unemployment will be even greater.
The continued rise in the number of notified redundancies would
certainly suggest that unemployment will continue to increase in the
17
Callan, T., Madden, D. and D. McCoy, Budget Perspectives 2003, ESRI.
Nor is a counter-cyclical adjustment of national interest rates a possibility given that interest rates are
now determined by the European Central Bank. However, given that interest rates are already
extremely low, it is unlikely that further reductions would have a significant impact on employment.
19
Feldstein, M., Economic Problems of Ireland in Europe, ESRI, 2000.
18
14
short-term. The rather downbeat short-term outlook is given further
credence by results from recent IBEC-ESRI Monthly Industrial Surveys,
which continue to reveal negative employment expectations among
manufacturing employers20. Given that the recent growth in public sector
employment has kept the rise in unemployment to a minimum, the
slowdown in the growth of public expenditure is likely to reveal a higher
underlying unemployment rate than is currently apparent. Even in the
event of an economic recovery in the near future there would probably
still be a lag period before the cyclical component of unemployment
responds to an increase in economic activity.
Both the ESRI and the Central Bank are forecasting an unemployment
rate of 4.5% this year before rising to 4.8%-5.0% in 200321
Conclusions
The analysis above suggests that the reduction in unemployment during
the 1997-2001 period was both cyclical (due to strong economic growth)
and structural (due to employment-friendly policies). The fall in
unemployment did not discriminate significantly on the basis of age or
sex. On the other hand, the recent rise in unemployment, while relatively
modest, has shown a noticeable age and gender bias with young males the
worst affected.
All the indicators point to a short-term increase in
unemployment with the cyclical component likely to be more pronounced
than has previously been the case. In the absence of a floating exchange
rate and a nationally determined monetary policy, measures designed to
20
Only the food sub-sector anticipated employment increases in the short-term.
The ESRI predict 4.8% in their Quarterly Economic Commentary, whereas the Central Bank predict
5.0% in their Quarterly Bulletin.
21
15
lessen the cyclical unemployment response will, therefore, be critical. In
the Irish Labour Market Review 2002, FAS called for new and innovative
approaches to national wage bargaining, which take cognisance of the
changed economic policy environment. De Buitlier and Thornhill22, and
McHale23 suggest two such approaches to national wage bargaining,
which could help smooth out fluctuations in unemployment over the
economic cycle.
While some increase in cyclical unemployment is almost inevitable given
the current economic climate, a rise in structural unemployment is to a
large extent subject to the appropriateness or otherwise of labour market
policies. There is a need therefore, to ensure that appropriate
interventions are in place to reskill those who become unemployed during
the downturn, otherwise there is real a danger that cyclical unemployment
will become structural.
22
De Buitlier, D. and D. Thornhill, “A Mechanism for Sharing the Fruits of Growth” in ESRI
Quarterly Economic Commentary, March 2001.
23
McHale, J., “Adding an Instrument to Social Partnership: A Proposal for Deferred Compensation”
in ESRI Quarterly Economic Commentary, March 2001.
16