Tuesday, November 7, 2017

7/11/17: To Fine Gael or not: Employment Stats and Labour Force

Recently, Fine Gael party PR machine promoted as a core economic policy achievement since 2011 election the dramatic reduction in Ireland’s unemployment rate. And in fact, they are correct to both, highlight the strong performance of the Irish economy in this area and take (some) credit for it. The FG-led governments of the recent years have been quite positive in terms of their policies supporting (or at least not hampering) jobs creation by the MNCs. Of course, they deserve no accolades for jobs creation by the SMEs (which were effectively turned into cash cows for local and central governments in the absence of any government power over taxing MNCs), nor do they deserve any credit for the significant help in creating MNCs’ jobs that Ireland got from abroad.

Now, to briefly explain what I mean by it: several key external factors helped stimulate MNCs-led new jobs creation in Ireland. Let me name a few.

  1. ECB. By unleashing a massive QE campaign, Mario Draghi effectively underwritten solvency of the Irish State overnight. Which means that Dublin could continue avoiding collecting taxes due from the MNCs. And better, Mr Draghi’s policies also created a massive carry trade pipeline for MNCs converting earnings into corporate debt in Euro area markets. The combined effect of the QE has been a boom in ‘investment’ into Ireland, and with it, a boom of jobs.
  2. OECD. That’s right, by initiating the BEPS corporation tax reform process, the arch-nemesis of Irish tax optimisers turned out to be their arch blesser. OECD devised a system of taxation that at least partially, and at least in theory, assesses tax burdens due on individual corporations in relation physical tangible activities these corporations carry out in each OECD country. Tangible physical activity can involve physical capital investment (hence U.S. MNCs rapidly swallowing up new and old buildings in Ireland, that’s right - a new tax offset), an intangible Intellectual Property ‘capital’ (yep, all hail the Glorious Knowledge Development Box), and… err… employment (that is why Facebook et al are rushing to shift more young Spaniards and Portuguese, French and Dutch, Ukrainians and Italians, Poles and Swedes… into Dublin, despite the fact they have no where to live in the city).
  3. EU. Not to be outdone by the aforementioned ‘academics’ from Parisian La Defence, the EU Commission helped. It waved in the utterly ridiculous, non-transparent, skin deep in fundamentals, Irish tax optimisation scheme that replaced the notorious Double-Irish Sandwich  - the scheme is the already mentioned above Knowledge Development Box. The EU Commission also aggressively pursued a handful of top MNCs trading from Ireland - Apple, Google, etc. This put more pressure on both the Irish Government and the MNCs to cough up some at least half-credible scheme that would show some sort of tangible business expansion and growth in Ireland.

So the result of all of the above has been a jobs boom in the MNCs-dominated sectors, a boom that soaked up quite a bit of the younger graduates from Irish Universities as well, but also helped to grow indigenous ICT sector in Ireland. The latter soaked up some more graduates. Unemployment fell. employment rose.

If this sounds like Nirvana, it ain’t. Because above the silver lining of the good and strong employment/unemployment numbers there is also a cloud of rather darker hues. That club is the Labour Force Participation Rate.

As Chart above shows, seasonally-adjusted LFP for Ireland stood at 59.8% in 2Q 2017 - matching the lowest recorded levels for the entire 16 years since the end of !Q 2001. And the lowest level in 13 consecutive quarters. Worse, as the chart above clearly shows, the dismal performance of the economy in terms of LFP has been in place since the Great Recession. In other words, all the recovery to-date has not been able to shift Irish participation rate.

Which brings us to the real point of the crisis: the current levels of LFP are much much worse than the comparable headline rates attained in 1999-2000. How? Simple.

  • Unlike in 2000-2001, we have years of net outward emigration (and continued net outward emigration for Irish nationals). This should increase LFP, and yet it clearly does not.
  • Unlike in 2000-2001, we have widening retirement age, not shrinking as was the case in 2000-2001. This too should have supported LFP to the upside. And again, it clearly is not happening.
  • In contrast with the 2000-2001, we also have more students in the third level and above education today. Which, again, should have supported current LFP to the upside relative to the early 2000s. 

And so on… in simple terms, our starting conditions (post-crisis environment) and our demographics all suggest that current LFP is reflective of deeper structural problem than the same LFP reading back in 2000-2001 was.

So, yes, Fine Gael can claim some strong record of improvements in the economy that took place on its watch. But, no, this is not the time to enjoy the laurels. Until such time when more Irish people go back to search for jobs, train for jobs and the LFP rises to 63.2% range (2005-2008 average), it is way too early for us to declare a victory over the Great Recession.

Now, what does 3.4% increase in LFP mean? To keep current rate of unemployment fixed at 6%, that means adding 70,450 new jobs and adding roughly 4,500 new unemployed to the Live Register. What that would take in terms of time? Given the current rate of 17,150 new employment added per quarter over the last 4 quarters, this implies about roughly 13 months of jobs creation.

Of course, attracting the disillusioned folks back into labour force is not as easy. So the more important bit is not whether we can achieve it, but rather, what would it mean in terms of economic policies necessary to achieve it? I expect answers from the various FG departments and may be even some Ministers…

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