Notes On The Front

Should We be Worried About Unemployment

In the public debate there is a sense that we have ‘solved unemployment’.  Apart from the recession-austerity period, unemployment has been low.  It fell below 5 percent in 2000 and remained there until the crash.  When the recovery started in 2012, it fell from 15 percent to 5 percent just a few years later.  And in the post-Covid period it has remained below 5 percent.  We may be facing into a number of challenges but unemployment doesn’t seem to be one.

Nonetheless, there are a number of early warning signals.

First, unemployment has started to rise, if only incrementally. 

Unemployment has increased from 4.1 percent in May to 4.8 percent in October.  In these five months, the numbers unemployed rose by nearly 20,000, or a 17 percent rise off a low base.  Not reason to panic, but certainly grounds for concern.  The key question is whether this is a once-off or the beginning of a trend.

Second, there is the warning from the Central Bank governor that the full impact of recent interest rate increases has yet to be felt in the domestic economy. 

‘The full impact of higher interest rates still lies ahead, [the Central Bank] warns. Even ahead of that there are what are described as tentative signs of a slowdown in export flows and corporation tax receipts, it notes. In both cases that slow down follows years of growth.’

In our property-centric focus, we sometimes forget that the intent of interest rate rises is to depress economic activity in order to bring inflation under control.  And this means depressed employment growth.  Rising unemployment is the price we pay for inflation control; at least, in the Central Bank’s model.

Third, are the Government’s projections for a slow-down in the job-creation rate. 

• In the 12-year period prior to the crash, employment was growing each year on average by over 6 percent.
• In the 8-year period prior to Covid, employment was growing each year on average by nearly 3 percent.

What is the Government projecting out to 2030?

After the post-covid bounce in 2023, employment increase slow considerable.  By 2030, job creation will only grow by ½ percent.  This shouldn’t be too surprising given the Government’s general projection of slowing growth rates throughout the economy (as discussed here).  This will have implications not only for household living standards as more people struggle to find work in a slowing labour market; it will impact on revenue generation. Lower job growth leads to lower income and consumption tax revenue.  And if unemployment rises, this imposes a cost.

However, the Government doesn’t believe slowing job creation will lead to higher unemployment.  They project that unemployment will remain below 5 percent out to 2030.  This is a function of a slow-down in the labour force – all those people who are either in a job or looking for one.  If labour force growth declines in tandem with the slow-down in job creation, unemployment will remain stable.  But this raises its own questions.

The Government projects that growth in the labour force will fall from 1.4 percent in 2024 to 0.6 percent in 2030.  The labour force will grow by approximately 41,000 next year.  In 2030 that growth will fall to 18,000.  Why?  Fewer young people leaving education to go into the labour force?  Emigration?  Increased exit of older people?  In the budget papers, the Government was silent – though it did state in the Stability Programme Update that ageing demographics would depress labour force numbers.

Whatever the reasons, we may have a problem.  We need more people to do more things – from construction, ICT to caring, health education professions, along with business specialists. This is on top of providing employment for young people coming out of education and encouraging more people back in the workforce (e.g. parents).   A slowing labour force could impede our ability to address our infrastructural deficits or supply the resources needed to expand business opportunities.

In policy terms we need to anticipate rather than wait for rising unemployment to overwhelm us.  And we need to get beyond the self-congratulatory commentary that employment has never been higher.  Of course, it’s never been higher.  Unless employment actually falls, this will always be the case:  every month, every quarter, every year. 

And whatever about slowing job-creation, if it falls starts to fall – or fall below the growth in our labour force – we could be in a world of hurt.

 

The Great Slowdown

While the discussion about falling GDP and its impact on the Irish economy is important – especially in assessing the performance of our multi-national sector – we are in danger of missing a larger point.  We are entering into a Great Slowdown, an extended period of low growth which will impact on a range of indicators; but most importantly, on incomes and living standards.

The Government is projecting that real economic growth (GNI*) will average 2 percent per year out to 2030.  However, when we factor in population growth (GNI* per capita) this could fall to less than 1 percent per year for rest of the decade. 

How does this compare with previous periods of growth?

• In the boom years from 1995 – 2007, the average annual growth rate per capita was nearly 4 percent. Of course, in the latter part of this period this growth, based on property-related activity, was unsustainable.

• In the recovery period after austerity, recession and stagnation average annual growth rates came in at a healthy 3.2 percent.

• However, out to 2030 average annual growth rates are projected fall to less than one percent.

This is not surprising.  Analysts have been predicting this slowdown for some time - here and throughout Europe. 

Cliff Taylor describes the current situation:  higher interest rates dampening economic activity, cost-of-living crisis dampening consumer spending, weakening international markets with a jobs market topping out.  Cliff describes these as ‘amber lights’.

It is tempting to think we can return to higher growth rates once we have turned the corner on these issues:  when interest come down, when we exit the current cost-of-living crisis, when international trade picks up again.  This might be a mistake. 

The medium-term growth slowdown is structural.  There are many explanations: ageing demographics, climate change, technological disruption (increasing use of AI and automation).  Given that these and other factors could hit all at once – and in some respects, they already are - many commentators have used the term ‘polycrisis’.  Whatever the reasons, it will have considerable implications for incomes and living standards, and set up fierce competition over a dwindling pool of resources.

We do not need to be resigned.  A growth slowdown will put new emphasis on a number of appropriate policy responses.

• First, even a small increase in average annual growth, over the long-term, can help lift the economy, generate higher tax revenue and promote living standards.  Increasing growth (i.e. productivity) will require higher investment in education, or human capital.  It will also require more democratic practices at firm level and sectoral – collective bargaining, employee participation, enterprise councils, worker-directors, sectoral planning – which have all been shown to promote growth and reduce inefficiencies.
• Second, it will put more emphasis on redistribution.  This is not just about cash transfers. Extending free public services will play a key role in reducing household and business costs.  This needs to be accompanied by a drive to eliminate poverty, especially child poverty.  The Society Vincent de Paul found that poverty imposes a high social, economic and fiscal cost.  Raising income floors – whether wages or fixed incomes – can help reduce this cost. 
• Third, John Fitzgerald reminds us that national income is not the only or even best way to measure life quality.  Environment, stability, security, and climate all play a role in people’s preference, especially working hours.  Therefore, in constructing a response to a growth slow-down, special attention will need to be paid to life quality issues, workers’ preference and their ability to exert more control over their working and work-free lives.

The growth slowdown demands an egalitarian and democratic response.  Most of all, it requires a different kind of debate.  There is a danger that the next general election (which looks sooner rather than later) will be fought on the assumptions of high growth.  Not only will this disappoint down the line, it could risk over-looking those policies which can actually advance strong living standards, policies that are deliverable and necessary in a low-growth environment.

There is no iron-law that states that a low-growth economy means a low life-quality environment. But progressives and trade unionists first need to analyse what is likely to happen in the economy in the years ahead and prepare the appropriate policy responses.   The last thing we need to do is promote policies that are out of step with a changing political economy.