Monday 26 September 2016

In rent, employment and retraining, there is no such thing as certainty

Published 05/11/2015 | 02:30

Tánaiste Joan Burton and Labour minister Ged Nash at the Forum for a Living Wage in Dublin Castle recently. The Government report on ‘The prevalence of zero-hour contracts’ should mainly have been looking for unscrupulous employers who break the rules and put workers on outlawed contracts
Tánaiste Joan Burton and Labour minister Ged Nash at the Forum for a Living Wage in Dublin Castle recently. The Government report on ‘The prevalence of zero-hour contracts’ should mainly have been looking for unscrupulous employers who break the rules and put workers on outlawed contracts

Rent certainty, wage certainty and retraining certainty. All have been in the news over the past couple of days. All have become political and ideological footballs, to a greater or lesser extent.

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But evidence and fact have received less attention than they might in discussions and debates. Spin and populist posturing have been more in evidence than they should.

Permit me to start with an observation that links all three issues. When discussing the role of the State and the role of markets in such things as housing, wage-setting and improving employment outcomes, there tends to be a polarisation of views.

Many on the left instinctively distrust businesses and bosses. They want more government regulation of the private sector and more involvement of the State in the provision of services. Many on the free-market right instinctively distrust government and bureaucrats. They want the State to keep regulation to a minimum and allow the private sector to provide for needs and wants.

Many people on both sides react to issues in a predictable, knee-jerk way. Instead of parking their ideological prejudices when issues arise and considering the evidence and what works, they all too often wade in, opposing or advocating things on the basis of whether they fit their ideologies.

Given the huge amounts of evidence and data we now have on so many policy issues, there are few excuses for coming laden with ideological baggage.

Societies need both efficient markets and efficient states. Both tend to have inherent strengths and weaknesses, but very often they complement each other, with the strengths of one making up for the weaknesses of the other.

Retraining those who are out of work is a perfect example, as the market will not, for instance, spontaneously retrain a jobless builder whose skills are of use only on a construction site. If the State does not step in, unemployment, under-employment and under-skilling will be greater than they otherwise need to be. An efficient State training system makes the labour market work more efficiently. Individual and societal welfare are boosted if training matches market needs.

It is hard to describe how far the Irish model is from that achievable goal. During the boom years, and despite the huge falls in unemployment, training budgets were not cut back to reflect lower demand. Worse still, those tasked with spending the cash found ever more wasteful ways of doing so. In order to mask this waste of taxpayers' money, no attempts were made to see how effective (and ineffective) different schemes were.

When the crash came, the gross failings of the system were exposed. As joblessness soared, efforts began to be made to see what was working and what wasn't.

On Tuesday, more evidence on the abject failure of the State to retrain and reskill people was published, adding to an already large body of existing evidence. In the latest case, the ESRI found that people who availed of the Back To Education Allowance (BTEA) were actually considerably less likely to find work than people who availed of no State scheme. More than €1bn has been poured down the BTEA drain since the economy crashed.

If there is a lot of uncertainty around retraining, there is better news on wage certainty. Also published on Tuesday was a separate study of zero-hours employment contracts.

Again, some background is useful. These contracts became topical here last year mainly because they were making headlines in Britain. Across the water, some workers are contractually obliged to be available for work, but employers are not contractually bound to pay them a penny.

This is an unfair skewing of rights in favour of one group over another.

But here in Ireland legislation prevents the use of such contracts - on a weekly basis workers must be paid for 25pc of the hours when they were effectively on standby, or paid for 15 hours, whichever is less.

The report commissioned by the Government on "the prevalence of zero-hour contracts" should, therefore, have mostly been looking for unscrupulous employers who break the rules and put workers on outlawed contracts.

Instead, the 160-page report discussed other kinds of work contracts and said on zero-hours contracts that they are "not extensive in Ireland".

This is bizarre use of language. The huge report had almost nothing to say on zero-hour contracts because the study found absolutely no evidence whatsoever that they exist at all! And finally…rent certainty. It is almost impossible to believe that rapidly rising housing costs are a problem so soon after having one of the biggest housing bubbles and crashes ever recorded, but that is the sad reality.

Yet again, some factual context may help to inform.

Private rents across the country collapsed in the 2008-09 period. The average monthly rent stabilised in 2010. It then started on a very modest upward trajectory, tracking changes in wider consumer prices.

In late 2012, as economic recovery began, things changed dramatically. Rents simply took off, decoupling from the wider (still very low) rate of inflation. In recent months they have surpassed the pre-crash peak.

The soaring rate of rent increases shows no sign of slowing. Given a range of factors - a growing population, rising incomes and too little building in urban areas - there is no reason to believe the rent inflation will slow over the next couple of years.

Legislating to prevent landlords from increasing rents would skew the balance of rights in favour of tenants and away from owners.

This would have negative consequences not only for the owners concerned, but also for the future investment in the rental sector - and anyone who denies there is a downside to imposing controls either doesn't understand how markets work or doesn't want to understand.

But despite the downsides, taking such a measure in the short term could meet the proportionality test - housing is such a basic need and a two-year rent freeze could allow time for more homes to be built. If there was an example anywhere which shows that the upsides outweigh the downsides, then it would be actively worth considering. I can't find such a case.

By contrast, the weight of evidence from across Europe strongly suggests that trying to hold down rents by means of regulation and legislation does more harm than good.

A study* last year of the 28 members of the EU found that "Rent controls appear to have a significant destabilising impact on the aggregate housing market" going on to add that "the drawbacks of rent controls in terms of unintended consequences for housing market stability and negative effects on labour mobility would advise against their use for redistribution purposes".

As has been said so frequently in relation to the housing crisis, the problem is one of supply. The State can influence the supply of housing in multiple ways, via regulation, taxation and the social housing system. Using these tools to address the roots of the problem, rather than rent controls to address its symptom, is the way to go.

*http://ec.europa.eu/economy_finance/publications/economic_paper/2014/pdf/ecp515_en.pdf

Irish Independent

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