Friday 28 October 2016

Known unknowns in great job creation success story

Published 22/09/2016 | 02:30

AMID the encircling gloom, the employment figures continue to shine. So much statistical fog has descended on GDP, wealth, and even government finances, that it is worth remembering that the jobs data is among the more reliable.

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The scale of the quarterly national household survey - published last month for the first half of the year - makes the normal opinion poll look like a chat in a telephone booth; and we know how accurate they claim to be.

Admittedly, the survey asks more complex questions than who one intends to vote for, and its definition of employment (one hour a week) is narrow. I have always had particular regard for the one which asks people to describe their own employment status.

Almost all the answers for the first six months were unambiguously positive. Total employment went above two million for the first time since 2009.

That is just a number of course, of no significance in itself, except psychological. However, at 146,000 below the 2007 peak, it may actually be a good guide to recovery from the losses of the Crash.

The economy created 56,000 jobs in the 12 months to July, and the increase has averaged 2pc a year since the upturn began. Job creation on this scale is the holy grail of economic recoveries but there is a sense that it has rather been taken for granted.

It may make sense to make more effort analysing what seems to be working than harrumphing over winter waiting lists in hospitals, with no idea what to do about them. Not that one should expect easy answers from analysis of success either. IMF studies found some evidence of correlation between employment growth and labour market flexibility (aka hire-and-fire) but it was not dramatic and threw up several surprises.

There may be more merit in the closer inspection in a recent research paper from economists at the Central Bank. Reamonn Lydon and Matija Lozej looked at the wages of newly-employed workers and compared them with the earnings of existing staff or those who had been hired directly from another job. (Their opinions are their own).

They would not have foreseen the extra relevance this might appear to have as a result of the new deal to restore the lost pay and conditions of newly-hired teachers. In fact, the research did not include the public sector, so there is no great relevance - except in one regard.

The researchers note that the national wage agreement, abandoned in 2010, stipulated that new employees should receive the same terms as existing ones, including wages.

They surmise that the end of these agreements may, in part, have made it easier for firms to lower the wages of new hires during the downturn, which, they find, is what happened.

The core conclusion is that a 1pc increase in the unemployment rate reduces the pay of new hires pay by 1-1.7pc. The cumulative effect was quite striking.

At the bottom of the trough, in 2013, new employees' pay had declined by over 20pc from 2007 levels, with the pay of other groups reduced by around 5pc.

There is one complication which seems very relevant. The researchers found a way to distinguish from the statistics whether new hires had been unemployed or out of the labour market, or were coming from other jobs. That made a significant difference.

In the downturn, there was a bigger reduction in pay for those who were coming from unemployment than from other jobs. Not only that: new workers with lower education or those who were older, but not old enough to wait out the unemployment spell until they become eligible for retirement, received lower pay than those who were younger or had better qualifications (all other things being equal).

Bloody unfair, isn't it? And yet the question remains as to whether those people would have been better off if the "Towards 2016" social partnership agreement had remained in force - or would many more of them have stayed unemployed|because wages were fixed?

Not even this research can answer that: we have to draw our own conclusions. The paper's main one is that economists should not make the general assumption that l wages tend not to fall in recessions. That 20pc reduction is large by any standards.

They also make the fair point that, when the downward pressure on wages is taken into account, the benefits of that welcome reduction in unemployment may not be as great as the simple numbers might imply.

Even so, it is still more than welcome. Ulster Bank chief economist Simon Barry, in his analysis of the latest figures, notes the "encouraging" halving of the long-term unemployment rate to 4.4pc since 2012.

There is always lots going on behind such figures, including emigration, staying in education, or giving up the ghost when it comes to job-seeking. The Crash did indeed take 150,000 people out of the labour force, although the workforce too has begun to increase in the last two years. Last week the ESRI looked at participation rates, especially for women. It found that some 40,000 more students are in education than would have been expected from population trends. They will be swelling the labour force over the next few years.

Provided there is not another downturn, the central bank research suggests they can expect to be hired on favourable terms compared to existing staff. There may even be jobs for them.

The current labour force is likely to reach full employment by the end of the decade, according to the report co-author John FitzGerald.

The causes of all this are not clear. When employers were asked whether downturns made it easier to hire people on lower wages, supposedly sclerotic Spain was one of the more flexible. So was Ireland, although not as much as the orderly Dutch. In low-wage Portugal, employers thought downturns made little difference.

There is plenty more work here for researchers to try to disentangle the myriad of factors that seem to make some countries more successful than others in creating jobs. One of them is undoubtedly growth: the fit between Ireland's GDP and employment - up and down - is almost exact.

In the meantime, it would be as well for policymakers to tread carefully. The Irish experience was against the background of one of the highest minimum wages in Europe.

Does that mean the legal floor makes no difference, or would more unemployed have been left stranded if it were even a bit higher? As demands for radical increases swirl around the political system, it is as well to remember that, when in the dark, it's better to proceed in small steps.

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