The Pursuit of Full Employment
Key issues
Marie Sherlock
May 1st, 2014
NERI Labour Market Conference
Overview
1) What is Full Employment?
2) Employment recovery to date in Ireland- some features
3) Unemployment and Inactivity
4) Key issues in the pursuit of Full Employment
The context
Government’s Medium Term Economic Statement 2014-2020
• Return to full employment by 2020 was identified as one of the key policy
outcomes arising from the Government’s three pronged strategy for recovery;
achieving debt sustainability, improving access to finance for growth and
supporting living standards and employment.
• Full employment understood to be consistent with a 5%- 6% unemployment rate in
line with estimates of NAIRU for the Irish economy.
Key issues
1) Just how much can we infer about employment dynamics in the Irish Labour
Market from the unemployment rate?
2) Is Full Employment as currently defined sufficiently ambitious for a sustained
recovery of the Irish economy?
What is Full Employment?
Two Traditions of Thought.
1. NAIRU as a Monetary target
• Highlighted in Keynes’ General Theory and defined in terms of zero cyclical
employment (less job search frictions) with the level of structural unemployment
taken as given over the short run.
• Obvious parallel with Phelp’s “natural rate of unemployment” hypothesis (1968)
which is the level of unemployment consistent with equilibrium between the wage
setting real wage and price setting real wage.
• Consensus breaks down on (i) trend change in structural unemployment over LR and
(ii) efficacy of monetary policy. Monetarists view natural rate as mean reverting due to
long run money neutrality and adaptive expectations. Keynes saw upward movement
of structural unemployment as failure of SR monetary policy to respond to economic
conditions.
• “Full Employment” was instituted as part of the twin policy mandate of the US Fed in
1978, but was only operationalised in late 2008, (Thornton, 2012).
• In 2013, both Bank of England and US Fed adopted (un)employment targets as part of
their respective forward guidance policies.
What is Full Employment?
Two Traditions of Thought.
2. Higher Employment rate to support fiscal and welfare policy
• Beveridge Report (1944) highlighted need to increase employment rate to sustain
and pay for the postwar welfare state in Britain.
• UK Government adopted employment target of 80% in 1995 on foot of report from
De Koning, Layard et al (2004). Prompted major welfare reform and increased
targeting of discouraged workers and disadvantaged groups etc.
Overview of Irish labour market recovery
to date
• Between trough in Q3 ‘12 and Q4 ‘13,
90% of the increase was in FT work.
• 84% of employment increase since the
trough went to Irish nationals.
• 44% of non agricultural increase was in
self employment yoy to Q4 ’13.
• Only 16% of non agri yoy increase was
in professional and associate
professional occupations during that
same period.
Source: CSO QNHS
The jobs gap- 2007/2008-2013
316,068 jobs need to be created from 2014 to restore
Employ/WAP ratio to 69.2% (peak 2007)
Source: CSO QNHS
Unemployed and inactive as share of
broad labour force measure
• PLS4 indicator of
unemployment stood at 23.9%
in 2013.
• Over half (12.8%) can be
classified as marginally
attached in 2013- more than
twofold increase since 2007.
• Marginal downward trend in
STU and LTU in 2013 but share
of
discouraged/underemployed
jobseekers continues to rise.
Source: CSO QNHS
Key issue is what do we know about who is
gaining employment?
Inadequacy of Full employment as a measure of Labour Market slack
Chair of US Fed. Reserve in a speech in March recently highlighted the need for
additional measures of labour market conditions to measure labour market slack
(i) Movement in the Participation rate
(ii) Underemployment
(iii) Wage growth
(iv) Labour market “churn”
(v) Voluntary quits
(vi) Long term unemployment (Blanchflower and Posen, 2014).
These have important implications for NAIRU of a particular economy by which “full
employment” is measured, in that the actual rate could well be much lower compared
with the identified level of 5%-6% in Ireland and elsewhere.
(i) Participation rate
Participation rate 1998- 2012: LF as a
share of working age population
• Even during the boom years, Ireland’s
labour force participation rate as a
share of the WAP was below that of
other small open economies.
• WAP kept rising until 2010 and then
fell by 0.2% between 2010 and 2013.
• Share of students plus retirees of WAP
has increased from 19% in 2007 to
22.8% in 2013. Share was 21% in
1998.
• Lower participation rates overstates
progress in reducing unemployment
rate during recent recovery.
Sources: OECD Datalab, CSO QNHS
(ii) Underemployment as share of total
employment 1998-2013
Long term secular increase in part time and casual
work
50%
Almost 42% of the Part time workers in Ireland
are underemployed, although this may be higher
due to underreporting.
- 24% of all workers in Ireland were in Part
time employment in 2013 up from 17% in 1998.
-
45%
40%
35%
30%
PT 2013 (vol)
25%
PT 2013 (invol)
20%
PT 1998 (vol & invol)
15%
10%
5%
0%
Source: Eurostat,
(iii) Wage growth
Implications of Labour Market Slack:
• Cyclical decline in participation rate and increase in underemployment
separately and together exert downward pressure on wages. (Blanchard
and Posen, 2014).
• Increase in some part time work patterns give rise to increased dependency
on state income supports- approx. 19% of those in PT employment were in
receipt of Jobseekers allowance or Jobseekers benefit in Q3 2013. In 2006
the share was 6%.
Policies to address Participation
Overcome constraints to labour force participation:
• Provision of adequate and affordable childcare
• Marginal tax rate for second earners in households with children
Upskilling within the workplace
• OECD PIAAC scores find below average literacy and numeracy scores across Irish
workforce (2012 data) and above average mismatch between the over-skilled and
the under-skilled in the workplace. This will present future challenge for labour
force adaptability to new technologies.
Youth unemployment problem
• Further research needed about true level of NEETs in Ireland (not in education,
employment or training) given the conflicting results from Eurofound, DSP
studies.
• Current youth unemployment problem is more structural than cyclical- approx.
74% of youth unemployed have education up to PLC level and long term
unemployed rates amongst those with education at PLC level is 18% (LTU rate
for higher secondary education attainment is 21%) up to Q3 2013.
Source: CSO QNHS
A more ambitious Full employment target
Full employment must be about having a low unemployment rate and a higher
employment rate.
• NAIRU has historically proved itself to be an unreliable estimate for forecasting “full
employment“ in Ireland due to difficulties in estimating potential output gap.
Comparative NAIRU study in 1991 concluded that Ireland’s NAIRU rose from 9%
between 1969-1979 to 13% in the 1980’s (Layard et al, 1991) and yet the fall in
structural unemployment outpaced the decline in short term unemployment
between 1994 and 2001 (Walsh, 2004). The “reverse hysteresis effect” during this
period helped dampen wage inflation pressures, (Keeney, 2008).
• Key issue now is whether NAIRU metric encompasses a comprehensive measures of
labour market slack.
• More appropriate to identify employment target for the Irish Economy. Ireland’s
employment rate was 60.2% in 2013. Conservative starting target should be to get it
to 70% in line with 2012 estimates for UK (70.1%), Finland (69.4%), Denmark
(72.5%).
Sources: OECD Datalab, CSO
QNHS