The Selected Issues paper describes the nexus between household wealth, saving, and consumption, and provides estimates for the medium-term path of household saving and consumption. The paper also discusses to what extent the credit market frictions are holding back Ireland's economic recovery. Under current macroeconomic assumptions, the savings rate is expected to decline. Households have rapidly accumulated debt during boom times, and incomes and asset values have declined severely during the crisis. The Executive Board welcomes the country’s efforts toward economic recovery.

Abstract

The Selected Issues paper describes the nexus between household wealth, saving, and consumption, and provides estimates for the medium-term path of household saving and consumption. The paper also discusses to what extent the credit market frictions are holding back Ireland's economic recovery. Under current macroeconomic assumptions, the savings rate is expected to decline. Households have rapidly accumulated debt during boom times, and incomes and asset values have declined severely during the crisis. The Executive Board welcomes the country’s efforts toward economic recovery.

IV. Averting Structural Unemployment in Ireland 1

A. Introduction

1. The economic crisis that engulfed Ireland since 2008 brought about a rapid reversal of labor market gains made since the mid-1990s. As real GDP fell 8 percent between 2007 and 2010, almost 15 percent of jobs were lost, half of which from the construction sector. The rate of unemployment tripled from pre-crisis levels to almost 15 percent in 2012, and even higher among certain population cohorts. Participation rates dropped and migration patterns reversed, with outflows of non-Irish citizens at first, and then increasingly net emigration of Irish citizens.

2. Faced with soaring unemployment, the Irish authorities have initiated a range of measures and labor market reforms:

  • Labor cost and demand: to promote job creation, the May 2011 Jobs Initiative halved the pay-related social insurance (PRSI) rate of 8½ percent on jobs paying up to €356 per week (5.5 percent above the minimum wage) to reduce labor costs, and, to stimulate labor demand, gave a 4½ percentage point VAT rate reduction on items subject to the lower VAT rate of 13½ percent, which are mostly labor-intensive services.2 The Action Plan for Jobs released in February 2012 specified a set of measures to support job creation, including support for indigenous start-ups and fast-growing mid-size firms, further enhancing SME credit and R&D incentives, and pursuing targeted growth opportunities in the green economy and the ICT sector.

  • Activation and training policies: the Pathways to Work initiative of February 2012 is a comprehensive reform agenda for the support provided to unemployed persons in regaining employment, to bring it in line with international best practice.

  • Sectoral wage setting: The Industrial Relations (Amendment) Act passed in July 2012 reforms the special wage setting framework applied in certain sectors, with the aim of increasing the responsiveness of labor costs to economic conditions, to increase employers’ willingness to hire and facilitate the cross-sectoral adjustment.

3. Nonetheless, unemployment may remain high for a number of years, risking an increase in structural unemployment. Already over 60 percent of the unemployed have been without work for over a year, and Ireland’s recovery would be constrained if unemployment were to become more structural. Accordingly, this paper aims to identify further reform avenues to facilitate job rich and sustainable growth into the medium term. Section B sets the stage with a background on the labor market developments in Ireland in the last decade. The broad challenges to reducing unemployment are discussed in section C and section D aims to identify the main issues that may raise the risk of structural unemployment. Policy options are discussed in section E.

B. Irish Labor Market: Before and After the Crisis

4. Ireland’s rapid economic growth from the mid-1990s translated into a major improvement in labor market conditions. Employment grew 65 percent from 1995 to 2007 while Ireland’s population rose only 19 percent. Jobs became available not only for the officially unemployed but also for new labor market entrants, with participation rates rising, especially for women, where a 16 percentage point increase brought participation to the euro zone average by 2007. Ireland also attracted migrants, providing an estimated 450,000 (or 35 percent of 1996 population) net boost to the population and, in part, to the labor force. By 2000, the unemployment rate fell below 5 percent from almost 19 percent a decade earlier.

uA04fig01

Real GDP growth and unemployment rate

(percent)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Sources: Eurostat; OECD; and IMF staff calculations
uA04fig02

Participation rates (percent)

(Q1-08 = 100)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

1/ Data on partcipation rates for Ireland for 2005 interpolated due to missing data point in the Eurostat

5. However, this improvement in headline indicators masked growing structural imbalances. The credit-led property boom drove rapid employment growth in the non-tradable sectors (mostly construction) to a greater extent than in other European countries. The number of working hours per employee fell around 12 percent between 1990 and 2007, exceeding the declines observed in other European countries. Despite the expanded labor force, labor shortages started to manifest, leading to a 45(15) percent increase in nominal (real) wages between 2000 and 2007. Minimum wages rose, to the second-highest level in the euro zone. As remuneration rose faster than productivity, Ireland’s competitive position started to erode, limiting export growth, at least by domestic companies.

uA04fig03

Real monthly minimum wage, real hourly wage, and real labor productivity

(annual percent change)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Sources: Eurostat; OECD; and IMF staff calculations.
uA04fig04

Employment in construction

(2000 = 100)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Sources: Eurostat; and IMF staff calculations.
uA04fig05

Labor Force vs. Annual Hours Worked

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Sources: Lusinyan and Bonato (2010); OECD; and IMF staff calculations;
uA04fig06

Output gap versus unemployment gap

(percent)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

6. The collapse of the property bubble in 2008, and the severe recession associated with the resulting banking crisis, impacted heavily on labor market outcomes. Almost 15 percent of jobs were lost between 2007 and 2011, with the construction sector shedding around 60 percent of employees, followed by industry, retail trade, and the tourism and food industry. The greater increase in the unemployment gap than the output gap illustrates the labor intensity of the sectors in which job losses were most prevalent. Unemployment surged to around 14¾ percent in the first quarter of 2012, and rose even more among young persons (to 30 percent), workers with lower education, men, and in certain regions. Involuntary part-time employment increased, and migration patterns reversed, with Irish citizens emigrating in search of jobs. Long-term unemployment has risen sharply, raising the risk of permanent skill losses among jobseekers and hence a decline in potential output in future.

uA04fig07

Increases in unemployment rates per cohort

(relative to the unemployment rate in Q4-2007)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

1/ Includes pre-primary, primary and lower secondary education (levels 0-2)Sources: Eurostat; and IMF staff calculations
uA04fig08

Unemployment and Underemployment Rates

(Percent, NSA)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Source: Central Statistics Office Ireland.1/ Workers employed part-time who are willing and able to work full-time.2/ Workers employed part-time who are willing and able to work full-time and people marginally attached to the labor force.

C. Challenges to Reducing Unemployment

7. The economics literature indentifies a range of potential difficulties in creating a job-rich growth. Post-crisis recoveries are often jobless, and there are several factors that contribute to this phenomenon:

  • Due to structural changes that take place in the economy during the recession (e.g. collapse of certain sectors) job losses are often permanent, and once the recovery takes hold, workers are not rehired to their previous posts. Since creation of new work places in different firms and industries takes time, job creation lags the recovery in output (Groshen and Potter, 2003).

  • Job polarization. Jobs that are being created in the last decade are increasingly either relatively high-skilled and highly paid, or low-skilled and low-paid. At the same time, the middle of the job distribution is hollowing out due to a disappearance of the “routine” jobs–those that are easily partitioned into a set of tasks, eventually to be substituted by technology, or moved offshore to take advantage of lower wages (see Autor et al. (2003) for evidence from the U.S., Goos and Manning (2007) for the U.K., Goos et al. (2009) for a pan-European study, and Acemoglu and Autor (2011) for a theoretical framework and U.S. evidence). Most of these jobs disappear during recessions and do not return thereafter, contributing to the phenomenon of “jobless recoveries” (Jaimovich and Siu, 2012).

  • Firm-level restructuring. Organizational changes that take place during the recession result in elimination of unneeded labor, especially among small firms that cannot afford to hoard workers. In addition, small firms are also more likely to close during recessions (Kolsenikova and Liu, 2011). Once the recovery takes hold, small firms may take longer to rehire; also the creation of new enterprises takes more time. In Ireland, firms employing less than 250 workers lost around 17 percent of their personnel, while employment in large firms shrank by 10 percent.

8. In Ireland’s case, a number of these factors could limit the scale of medium-term recovery in employment, risking a more extended period of high unemployment. Ireland’s high unemployment rate clearly reflects the sharp drop in domestic demand and economic activity, and an economic recovery is needed reduce unemployment. However, considering the depth of the banking crisis, still high private sector debt burdens, and ongoing fiscal consolidation, domestic demand recovery is expected to be a protracted process. Moreover, while some recovery can be expected even in the sectors hit the hardest by the crisis, such as construction, they are unlikely to rebound to former activity levels. 3 Although the tradable sector has greater potential to expand, Ireland’s current exports are predominantly capital intensive, even in sectors that tend to be domestically owned such as food processing. With the share of long-term unemployment already high, a more extended period of high overall unemployment would risk unemployment becoming structural.

D. Potential Risk Factors for Higher Structural Unemployment

The aim of this section is to identify key labor market challenges that could constrain the supply of labor once the recovery has started. To facilitate the analysis, these are classified into three broad groups: skill matching of labor, cost of labor, and labor participation.

Skill Matching

9. As the crisis unfolded, unemployment rates for workers with low levels of education soared. By Q1-2012, unemployment rates among men with primary education spiked to almost 30 percent, and reached 20 percent for women. Unemployment rates for men with secondary education were lower, but still reached 20 percent (around 14 percent for women). Unemployment rates among persons with tertiary education rose but still remained in single-digit territory. This outcome was a direct result of the nature of the crisis, which hit especially hard construction and other labor intensive sectors like industry, retail trade and hospitality, affecting many relatively less qualified, and predominantly male workers.

article image
Shares as of Q1-2012Source: CSO; and IMF staff calculations.
uA04fig09

Unemployment rates among men per educational attainment

(percent)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Source: Eurostat
uA04fig10

Unemployment rates among women per educational attainment

(percent)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Source: Eurostat

10. The Irish authorities have responded by initiating reforms of the system of engagement with the unemployed including training:

  • The job search assistance and monitoring programs existing under the National Employment and Action Plan were not delivering the required results (Grubb et al., 2009; McGuinness, 2011a; Pina, 2011). In response, the Pathways to Work (PtW) initiative was adopted in February 2012. It sets out a strategy to improve activation and training policies for the unemployed by: (i) intensifying engagement between jobseekers and employment services, (ii) better aligning the provision of training with labor market needs, (iii) establishing effective enforcement mechanisms to ensure that jobseekers comply with activation and training requirements; and (iv) strengthening links with employers to ensure a higher share of vacancies is filled from the Live Register of the unemployed.

  • The Irish Education and Training Authority (FÁS) (responsible for course provision) was transferred to the Department of Social Protection (DSP) with the aim of creating a unified National Employment and Entitlement Service that will be responsible for both activation and training provision. Furthermore, SOLAS, a new authority responsible for further education and training, is set to replace FÁS. SOLAS will initially retain the training function of FÁS, but with time course provision will be transferred to the 16 new Local Education and Training Boards that will replace the existing 33 Vocational Education Committees. At that time, SOLAS will transform into a body responsible for oversight and funding only (similar to the Higher Education Authority).

11. Spending on labor market programs has also increased, though passive support grew much more than spending on active policies. Since 2007, the budget on labor market-related programs has more than doubled. However:

Spending on labor market programs

article image

Includes measures to incentivise unemployed to take up jobs, direct job creation, supported employment and rehabilitation

Sources: Eurostat; and IMF staff calculations

Spending on training and job creation has declined per unemployed person. Most of the increase was directed to welfare benefits owing to the rapid rise in the number of persons registered as unemployed. Expenditures on training and job creation programs have risen less than the unemployment rate, so the share of such spending fell from 34 percent to 20 percent, and level of spending per unemployed person halved.

Spending on Active Labor Market Policies (ALMPs) has been heavily tilted towards job creation schemes (Pina, 2011). The Community Employment scheme, which provided part-time employment in local communities to around 24,000 unemployed persons in 2011, consumed over half of the resources of FÁS.4 At the same time, participation in the program does not improve employability of the participants, and they often exit to long-term unemployment (Forfás, 2010; McGuinness et al., 2011a). Similar results have been found for the Job Initiative (Forfás, 2010), though this scheme is now closed to the new participants. As noted by Pina (2011), despite problems identified in the CE and JI, the authorities expanded the CE during the crisis, as well as introduced a new scheme, Community Work Placement Initiative, which aims to provide 5,000 part-time jobs for long-term unemployed receiving only the unemployment benefit, with a 12 month participation limit.

12. The overall supply of training and education is substantial. Under the Pathways to Work initiative, in 2012 over 450,000 training and further education places will become available in Ireland, although further education and third level places are regular study places open to all students, so the number of places available to the unemployed is significantly lower. In addition, around 25,000 places are available under the Back to Education initiative, and around 5,000 places in the JobBridge internship scheme.

Training and Education Places in 2012

article image
Source: Pathways to Work
uA04fig11

Change in Labor Costs and Employment 1/

(Percent)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

1/ Change in employment calculated from peak in 2007 to 2011, change in labor cost from peak in 2009 to 2011.Source: Eurostat

13. However, it is challenging to identify and expand courses that are delivering best results, as regular evaluation of course outcomes is not yet in place. As noted by McGuinness et al. (2011a), completion of the training programs provided by FÁS does in general increase employment prospects of the jobseekers. However, not all courses are created equal: job-search skills and medium- and high-level skills training brought the best results while vocational training and low-level skills courses were less effective (McGuinness et al. (2011c)). Timely and sound evaluation of courses will also be crucial for designing effective up-skilling programs for jobseekers with low educational attainment, who may need a prolonged return to education rather than short-term training.

Cost of Labor

14. Nominal wages in Ireland adjusted downward during the crisis, but the decline was small in nominal terms especially given the scale of the total employment loss. From the peak in Q1-2009, average nominal hourly labor costs in Ireland have declined by only 2¼ percent, although the decline relative to the euro area was greater, at 6¾ percent (see Box 1 for discussion of nominal wage flexibility in Europe). Irish firms instead cut employment, with the almost 15 percent job losses being the second highest fall in Europe, exceeded only by Latvia. Employment cuts of 18 percent in the private sector since Q2-2008 exceeded the 8¼ percent reduction in the public sector. However, the public sector cut wages to a larger extent; between 2009 and 2011, the average hourly wage declined 3¼ percent compared to a 0.9 percent fall in the private sector. 5

uA04fig12

Private sector

(Q1-08 = 100)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Source: CSO
uA04fig13

Public sector

(Q1-08 = 100)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Source: CSO

Even in construction—the sector most affected by the crisis—average labor costs have fallen by only 9 percent so far, to 2008 levels, despite facing one of the highest employment declines in Europe.6

uA04fig14

Change in Labor Costs in Construction 1/

(Percent)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

1/ Change in total labor costs between 2009 and 2011 except for LV (2009-10), EE and LT (2008-10)Source: Eurostat
uA04fig15

Labor Costs in Construction

(2008 = 100)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Source: Eurostat

Nominal wage flexibility in Europe

Downward nominal wage adjustment is a difficult task to accomplish. A recent pan-European survey (WDN, 2010) and Babecky et al. (2010) found that when faced with the need to cut labor expenses, European firms are very reluctant to cut base wages, even for new employees, and reduce other components of compensation (bonuses, non-pay benefits) and employment instead. Similar conclusions are drawn by Bergin et al. (2012) for Ireland. They find that a significant proportion of wage changes, especially in sectors where male employment is predominant, cannot be explained by the characteristics of either the labor market or the workers, and is likely an outcome of firms’ reluctance to cut remuneration in order to preserve productivity. Wage stickiness can also be attributed to the salary adjustment cycle: in Ireland, around 72 percent of firms operate on an annual wage cycle and 13 percent change wages even less frequently. By comparison, in the euro area, the ratios are 60 percent and 27 percent, respectively (Druant et al., (2009).

Structure of the labor market is directly related to the degree of nominal wage flexibility. In particular, labor market institutions and degree of deregulation matter for flexibility of wage setting decisions. Dickens et al. (2006) found that high degree of unionization and existence of collective bargaining agreements (represented in Ireland by special wage setting framework of EROs/REAs in some sectors) has been associated with less frequent wage adjustments. Conversely, wages tend to be more flexible in countries where firm-level bargaining agreements prevail (Druant et al. (2009)). Stricter employment protection legislation has also been associated with less flexible wages (Clar et al. (2007)).

15. Sectoral wage agreements for some low-wage sectors in Ireland likely contributed to the behavior of wages observed during the crisis. Principally for sectors where the difficulty of organizing workers historically limited collective bargaining, there are two types of sectoral agreements, Employment Regulation Orders (EROs) and Registered Employment Agreements (REAs), which together cover about 23 percent of employment. Employment Regulation Orders (EROs), prepared by Joint Labor Committees (a government-appointed chairman and representatives of workers and firms) apply mostly to low-skill sectors such as retail, catering, and accommodation and set minimum wages for the sector (at about 10 percent above the National Minimum Wage (NMW) on average), together with a range of minimum wages for different skill and experience categories, as well as other employment conditions, such as overtime or Sunday rates. Registered Employment Agreements are collective agreements registered with the Labor Court, which then became legally binding on the individual firm, or—in case of industry-wide agreements (mainly in construction and electrical contracting)—for all employees and workers in the sector. In July 2011, the High Court deemed sections of the legislation related to EROs unconstitutional.

16. Reforms of EROs/REAs have recently been enacted, which in time are expected to improve the responsiveness of wage setting to economic conditions. The authorities commissioned a report on the EROs/REAs, which was completed in April 2011 (the Duffy-Walsh report). Based on its recommendations, as well as to address the High Court ruling, the authorities introduced an Industrial Relations (Amendment) Bill to the Oireachtas that was passed into law in July 2012. The bill allows for a reduction in the number of EROs and the number of minimum wages set in each ERO, and excludes conditions of employment covered in other legislation such as the Sunday pay rate. In addition, it also promotes a greater focus on economic conditions and competitiveness during the wage setting process.

17. Limited wage adjustment can also be linked with policies regulating the minimum wage. Given that the minimum wage constitutes a floor for remuneration, firms are prohibited from setting wages below the minimum wage even during crisis periods. A majority of academic studies point to a negative relationship between the level of minimum wage and employment (Neumark and Wascher (2006)).7 The effects can be particularly strong for low-skilled workers and for youth as high minimum wages decrease the flexibility of wage setting decisions at the lower end of the distribution, increasing job losses and preventing job creation in response to shocks. During the recent crisis, increases in youth unemployment were significantly higher in countries with high minimum wages than in countries where minimum wage was below the median (Ahrend et al. (2011)). While a minimum wage can be seen as a social protection tool that protects the most vulnerable groups, it can reduce employment if set on a too high a level (OECD, 2012). Although lowering a high minimum wage could increase income inequality, the effect should be at least partially alleviated over time through higher total employment (Koske et al. 2012).

18. Ireland’s minimum wage has becoming relatively high during the crisis. Up until 2006, Ireland’s minimum wage was broadly aligned with that in the U.K. However, the minimum was raised by €1 in 2007 to €8.65 per hour. Nominal increases in the U.K. increase were smaller, and in euro terms there was a significant decline owing to sterling depreciation. By 2011, Ireland’s mimum wage exceeded the U.K. by 30 percent, with a similar premium over the euro area.8 Even though the minimum wage direclty affects only a limited share of workers, it sets the floor for the EROs and REAs, which have a much broader takeup, at almost one-quarter of total employment.

uA04fig16

Youth unemployment rates in EU countries with high and low minimum wage 1/

(percent difference with respect to Q4-2007)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Sources: Ahrend et al. (2011), OECD, and IMF staff calculations.1/ Countries with minimum wage rates below those of the median country (the sample includes countries with no statutory minimum wage) are classified as low/no minimum wage countries (Austria, Czech Republic, Denmark, Estonia, Finland, Germany, Italy, Sweden). Correspondingly, countries with minimum wage rates above the median are classified as high minimum wage countries (Belgium, France, Greece, Hungary, Ireland, Luxembourg, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, and United Kingdom).
uA04fig17

Minimum Wage 1/

(Euro per hour)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

1/ The EA minimum wage is calculated as an average of the minimum wages in Belgium, Estonia, France, Greece, Ireland, Luxembourgh, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.Sources: OECD; IMF WEO; and IMF staff calculations.

19. Aiming to reduce labor costs, the authorities have temporarily lowered employer’s social security contributions for low wage workers. Under the 2011 Jobs Initiative, the Pay-Related Social Insurance for weekly wages up to €356 (5.5 percent above the minimum wage) has been lowered from 8.5 percent to 4.25 percent until end-2013. The regular rate continues to apply to weekly wages above €356. Together with lowering the VAT rate on tourism-related services (like hotels and restaurants) from 13.5 percent to 9 percent, the lower PRSI rate aims to increase employment in low-skilled sectors.

Participation Rates

20. A decline in labor participation rates during the crisis will need to be unwound to maximize employment recovery. Since the peak in Q3-2007, the participation rate fell by almost 5 percentage points, to below the euro area average. Withdrawal from the labor market was highest among young people and men—likely related to the collapse of the construction sector—and can be linked to a return to education. Female participation also declined below the euro area average, though the fall has been smaller.

Participation rates by age group and gender

article image
Source: CSO

21. Although much of the decline in participation reflects reduced job opportunities, the structure of the welfare system may reinforce this impact. Unemployment benefits with a long duration (Elmeskov and Pichelmann, 1993), more generous unemployment benefits for older workers (Tatsiramos, 2010), or sickness, disability or early retirement schemes (Nickell and Van Ours, 2000; Autor and Duggan, 2003) can all decrease the size of the labor force. A high tax wedge for certain population cohorts (e.g. employees that are low-skilled or families with children) can also result in unemployment traps. Lack of affordable child care can reduce female participation rates (OECD, 2012).

22. In contrast to most countries in Europe, unemployment benefits in Ireland do not vary with duration of the unemployment spell. Upon becoming unemployed, a person that has made enough social security contributions is entitled to the Jobseeker’s Benefit (JB) paid for 6 to 12 months. Reduced, or graduated rates, are payable where the average weekly earnings are under a certain threshold. Upon exhaustion of the JB, they are entitled to the means-tested Jobseeker’s Allowance (JA). Total benefits are increased if the person has a child or an adult dependent, or if they qualify for the rent supplement, mortgage interest supplement or a medical card.

23. This structure can create work disincentives for a minority of job seekers. Replacement rates for most of the newly unemployed on the Live Register fall below the OECD average, as around three-quarters of job seekers do not receive additional benefits. However, with time, the replacement rates rise substantially for those entitled to additional benefits. For instance, replacement rates in a one-earner married couple that receives child, adult dependent, and housing assistance benefits amount to 90 percent after 5 years of unemployment, far above the OECD average. Although at present less than 5 percent of the unemployed receive all benefits, this ratio may rise given rising unemployment durations.

uA04fig18

Average replacement rate for the newly unemployed single person without children; no additional benefits

(at 67percent of average wage; percent)

Citation: IMF Staff Country Reports 2012, 265; 10.5089/9781475510461.002.A004

Source: OECD; and IMF staff calculations.

Average of net replacement rates over 60 months of unemployment, 2010

For four family types and two earnings levels, in percent1

article image
Source: OECD

24. The structure of welfare payments and the tax system results in inactivity and poverty traps for some cohorts of the unemployed. For instance, low-wage workers with dependants face an average effective tax rate of over 100 percent upon return to employment, taking into account the withdrawal of the benefit. Since a significant share of currently unemployed are low skilled, their potential return to employment is most likely to occur at a low wage, so they may have an incentive to remain out of the labor force. Second, some cohorts, e.g., lone parents, when returning to full-time employment face marginal tax rates over 100 percent. Given that women constitute a majority of single parents, they may be less likely to return to full employment given the reduction in income and high costs of child care in Ireland.

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Source: OECD Tax-Benefit Model.

25. The linkage between welfare entitlements and exits from the unemployment can be seen in the Live Register data. Unemployed persons without dependents who do not receive housing supplement have exit rates that are 17 percent higher than average. However, the exit rates drop to around the average when two children are present in the household. Exit rates decline further if a dependent adult is present, and if the family qualifies for housing assistance, falling to 70 percent below the average exit rate for some households.

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Source: Department of Social Protection

QC stands for a qualified dependent child, QA for qualified dependent adult, HS for housing supplement (rent or mortgage interest/local authority)

E. Further Reforms to Avert Structural Unemployment

To maximize the medium-term employment generation from economic recovery, further steps could be taken. Possible measures to further deepen the labor market reforms undertaken since the beginning of the crisis are discussed in the same three groups as the previous section.

Activation and training policies

26. Further steps in reforming activation policies could be considered. The Pathways to Work initiative is an important reform that aims to bring Irelands’ activation policies in line with international best practice. Nonetheless:

• Even more active engagement with the unemployed from the start and its intensification once the length of the unemployment spell progresses could be beneficial. At present, due to staffing constraints, the new activation policies are only applied to new entrants into the unemployment, and not to job seekers currently on Live Register. In addition, under Pathways to Work, the newly unemployed that are not ranked as having a high probability of falling into long-term unemployment do not benefit from group or one-to-one interview until 3 or 12 months into the unemployment spell. Bringing forward interviews for all jobseekers would complement the result of the scoring model and help recognize those who have been misclassified as being of low risk of becoming long-term unemployed and allow earlier measures to be taken, e.g., appropriate training ((Kelly et al., 2012)).

• Job search activities should be monitored regularly and lack of compliance (either in job search or in undertaking or completing training) should trigger automatic reduction of benefits. The principle of mutual obligation, where receipt of unemployment benefits is conditional on active job search and participation in training, should be made clear to job seekers from the beginning ((McGuinness et al., 2011a)). Although the number of sanctions is increasing (around 500 people had their jobseekers’ payments reduced in the first six months of 2012 compared with 372 for the whole 2011), at 0.16 percent of all recipients they remain very low by international standards and the non-compliant are eligible to reapply for full benefits after two months.

27. Reallocating resources to labor activation is critical. The 2009 OECD report on activation polices in Ireland (Grubb et al., 2009) noted that the number of staff in employment offices, relative to the number of wage earners in the economy, was half that in other advanced economies. Although recently DSP staffing has been augmented due to a transfer of Employment Service from FÁS and Community Welfare Officers from Health Service Executive ((Kelly et al., 2012)), the number of job seekers per case worker is still above international best practice. Furthermore, it is necessary to ensure that case workers are adequately prepared for the task giving job search and training advice.

28. Engaging private firms to supply activation services for the unemployed could help. Private welfare-to-work programs are in place in some advanced economies, including Australia, the Netherlands, Germany, the U.K. and the U.S. Under such schemes, unemployed (usually long-term) are referred to private firms for job activation and training, and the providers are remunerated based on a success in placing the jobseeker into work (see Kuddo, 2012 and Finn, 2008, for an overview, Bredgaard and Larsen (2008) for discussion on the Dutch system, and Tergeist and Grubb (2006) for Australia)). Advantages of private provision of activation services include cost savings as well greater innovation and flexibility applied to putting the unemployed back to work. However, careful contract design is a priority in order to facilitate assessment of the quality of provided services and to avoid adverse outcomes, i.e. when all efforts are focused on most promising clients (“creaming”) while a bare minimum of services is provided to the rest (“parking”). A clear line of recourse for the clients is also needed to facilitate reporting of bad quality service provision. It is also important that success is not evaluated solely on the placement into employment, but also on the duration of employment after the placement takes place (Finn, 2008).

29. Expansion of programs to bridge education gaps should be considered given the high share of low-skilled among unemployed and their relatively young age. To that end, the number of places in programs like Youthreach (education and training for early school leavers), Springboard (program focusing on tertiary education) or Back to Education (opportunity to return to secondary or tertiary education) could be expanded. Consideration could also be given to shortening the unemployment period after which jobseekers are eligible to participate in the programs (currently jobseekers are eligible for the Back to Education allowance after being unemployed for three months (for secondary courses) or nine months (for tertiary courses)).

30. Close alignment of courses with labor market needs will be key. At present, training programs are selected based on the National Skills Database and the input of the Expert Group on Future Skill Needs, with the aim to provide courses that have the highest probability of employment in short- to medium-term. However, a system of regular monitoring of training outcomes, both immediately after completion of training and in the medium-term is urgently needed to identify training that results in the highest rates of exit to employment. To this end, creation of SOLAS and the Local Education and Training Boards should be considered a priority. To ensure broader provision of courses, a voucher system could be considered, allowing the unemployed participate in training outside of the system of courses contracted by FÁS/DSP, provided that course provider fulfills clearly-specified requirements.

Cost of Labor

31. Reducing the cost of labor, especially for low-skilled workers could boost employment creation. One step to achieve this would be to retain the lower PRSI rate beyond 2013 if the planned evaluation of this measure finds it to be effective. Although this is not a targeted measure so it implies a higher deadweight cost (lower PRSI is applied to all wages fall below the threshold, hence also to high wage earners), it is easier to administer and monitor compared to other schemes (Immervoll and Pearson, 2009; Pina, 2011).

32. A reduction in the minimum wage could also be considered in view of the scale of the employment growth needed. As mentioned, Ireland’s minimum wage is currently one of the highest in the EU. Lowering the minimum wage closer to U.K. and euro area average levels could enhance profitability and competitiveness of labor-intensive firms—including in sectors covered by EROs and REAs—facilitating a more job rich recovery over time. At the same time, the need to preserve an adequate premium over jobseeker benefits and allowances implies a limit on the extent of such a reduction in minimum wage (at present, jobseekers payments are at about 62 percent of NMW assuming a 35 hour work week). Moreover, targeted welfare support should be provided to protect the most vulnerable.

Participation rates

33. To help rebuild participation rates over time, a reform of jobseeker assistance and benefits could be considered to reduce high replacement rates that arise from the flat and open-ended structure of the payments. Some reductions have been implemented in Budget 2010 and 2011: payments to jobseekers aged 18 to 24 were lowered and criteria for full rate benefits were tightened. However, Pina (2011) estimates that these reforms have reduced the replacement rates for workers only marginally in both 2010 and 2011 as wages have also fallen, and additionally personal income taxes were increased in 2011. Despite these reforms, benefits remain flat for the duration of the unemployment spell. As unemployment durations extend, the attractiveness of initial employments options may decline, so the existing payment structure may increasingly hinder a return to employment.

34. Reform of the supplementary welfare payments could also be considered. As noted, these additional payments contribute to high replacement rates for some cohorts of the unemployed. The authorities are already preparing a reform of the housing supplement and plan to integrate the systems of social housing provision and rent supplement for those with long-term housing needs into a new means-tested Housing Assistance Payment. A further step would combine the supplementary payments into one means-tested payment, which should lower administrative costs while improving access to benefits, as some households may find it difficult to navigate the wide scope of payments (Pina, 2010).

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1

Prepared by Emilia Jurzyk. The author would like to thank Craig Beaumont and Ali Abbas for many helpful comments and suggestions. Vizhdan Boranova provided outstanding research assistance. The author is also grateful to the Irish authorities for providing data and for many useful discussions.

2

The items are mostly services, and include catering, restaurants, hotels, cinemas, theatres, museums, art galleries, fairgrounds, amusement parks, sporting activities, printed matter and hairdressing.

3

At the height of the boom, construction sector employed almost 13 percent of workers. During the crisis, this share shrank by more than half. If the share of construction in total employment increased to the EU average of 8 percent, and employment grew by 10 percent in the next medium-term, around 55,000 new construction jobs would be created. With 100,000 fewer jobs in construction, many former construction workers would need to find employment in other sectors. While some have already found new jobs or have emigrated, many may need retraining, such as those who left secondary school early for lucrative work in construction.

4

In 2012, Community Employment was transferred to the Department of Social Protection.

5

Calculations based on the Quarterly Earnings Hours and Employment Costs Survey.

6

The Labor Court ratified a 7.5 percent cut in minimum wages in the construction sector in January 2011.

7

Doucouliagos et al. (2009) note that these results may stem from a publication bias as papers presenting results that showed a negative relationship were more likely to be published.

8

A decision to lower the minimum wage back to €7.65 per hour in late 2010 was reversed effective July 2011.

Ireland: Selected Issues
Author: International Monetary Fund