Friday, February 19, 2010

Tackling Unemployment

Unemployment is truly a great scourge in economic and social terms.

It is welcome therefore to see that the main motivation of some of our most popular analysts (such as David McWilliams and George Lee) has arisen out of a genuine desire to deal with unemployment ills.

The present statistics however are certainly not encouraging. The official figure (for standardised unemployment) has risen from 4.8% in Jan. 2008 to 12.7% in Jan 2010.
However this does not convey the full story regarding worsening unemployment conditions. According to the methodology by which standard rates are assessed, 1 hrs. paid work a week would exclude one from the unemployed statistics!

However, we have also many others - still listed as employed - who may however have suffered a significant drop in working hours or in temporary contract work that may not be continued.
And even for those not yet directly affected a much greater degree of uncertainty exists with respect to the security of their employment.

While readily accepting that the recession poses special problems in terms of dealing with unemployment, much more imaginative measures could be taken by Government to help alleviate the situation.

The official line aims at a return to economic growth as soon as possible and then hope that employment will slowly rectify itself in the process. Thus with current concerns so much devoted to budgetary arithmetic and bank rescue measures, little attention has been focused directly on job creation.

In the modern economy, the bulk of employment - and especially new job creation - is in the services sector (accounting for close on 70% of total).
What would worry me however about the Irish situation is that a high proportion relates to "soft" employment in locally traded services that are very high cost compared to other jurisdictions. By their very nature little competition exists for such services. Though still requiring an appropriate level of domestic demand to remain viable, during the Celtic Tiger years this was substantially generated through artificial wealth creation in other sectors (speculative property development and multinational companies locating here for tax advantage purposes).

It is now slowly being realised that the Irish economy had in many ways become very uncompetitive during the boom years and that these problems will need to be addressed if we are to restore exports (especially for indigenous companies). However it is not really feasible to reduce costs for export firms while ignoring the problem of high costs in the locally traded economy. So as the artificial high incomes of the Celtic Tiger are reduced, the fall in demand in local discretionary services (e.g. restaurants and hotels) is likely to force down costs leading to a further increase in unemployment. However providers of essential services (e.g. energy, communications, financial, medical and pharmaceutical) in the absence of tough regulation, will still collude to maintain excessively high charges.

We are thus facing a Catch 22 situation at present. Though the Government is paying lip service to the need for improved competitiveness to retrieve the economy, instinctively it knows that any serious attempt to achieve this will create considerable further unemployment in the short-term. Though the recession will indeed force such competitiveness in certain sectors, costs for essential services are likely to significantly increase. And without such reform, adjustment to the recession will be somewhat uneven with overall competitiveness difficult to achieve.

Measures to deal with unemployment must therefore be realistic and consistent with the need to maintain - and indeed significantly improve - overall competitiveness. This clearly creates a considerable problem in the short run where an increase in present figures may prove inevitable.
So the following suggestions relate to measures that 1) relate more specifically to better management in the short-term and 2) creating more sustainable employment opportunities in the long run.

Apart from the adverse social consequences, dole payments to unemployed workers make little sense from an economic perspective (involving financial commitments by the Government with no productive return). Indeed there are likely to be further opportunity costs in a recession with loss in tax revenues, downward multiplier effects on economic activity and also possible additional costs due to rising crime levels.

Much more should be done therefore by Government to preserve existing jobs through a degree of subsidisation in appropriate cases.
Now this would require a greater degree of intervention in the day to day management of firms with every option explored for keeping workers (or at a least a proportion of them) in employment through a measure of state financial assistance. And if this entails a 4-day or 3-day week, surely this would be preferable than the alternative of the dole!

In the present climate, the problems of these firms would be in many cases be compounded through an inability to raise finance from existing banks. Therefore I would propose that a state bank - on the lines perhaps of the former ICC - should be set up to deal with the financial requirements of supported firms.

Though it would not be practical to have such a bank attempting to generally service business needs, it could however play a special limited role in cases such as this i.e. where jobs could be reasonably saved through additional financial assistance by the state. (Also additional temporary placements of young people with firms providing valuable work experience could also be facilitated in this manner!) Remember that the failure to preserve such employment in a recession would require extra expenditure by the State in any case! So the alternative option of using this money to actually save many of these jobs represents a much more sensible strategy.

Even with such a policy, unemployment unfortunately in the immediate future is likely to rise. However much greater imagination however could be used to provide community based work activity for those presently unemployed.
I am not of course suggesting this as an ideal answer as the loss of employment has major implications in personal, financial and social terms.
However I would still propose however that when this happens, that a much better strategy would attempt to maintain an affected individual active and involved in some alternative work capacity.

Our current notions of work are unduly influenced by the needs of the market based economy. Meanwhile however it is glaringly obvious that many community based tasks - that can serve a valuable role in their own right - are not properly serviced. Alternatively when they are provided, their value is not adequately recognised.

For example, carers in our society give a huge commitment in time and energy to looking after the needs of others. However most of these (tending to loved ones in their homes) would be deemed as unemployed, though the opportunity cost of replacing such care with paid employment through health and social services is considerable.

However there are many other activities in communities - not carried out by the market economy - which are inherently of significant value.

Therefore I believe that an enormous opportunity is being lost during our recession in not seeking to mobilise the unemployed to carry out such activities.

Of course a great deal of attention would need to be given to appropriate ways of organising this work.

My own suggestions would go something like this. Each local community - perhaps based on traditional parish lines - should be asked to come up with suggestions as to the kinds of work that could be usefully provided (not presently being offered on a market basis). These could range from tidying up operations such as removing litter to calling on old people in their homes, helping with sports based activities for young children, community based neighbourhood watch schemes, providing time relief for carers etc. Now many of these may already be provided to a certain extent on a voluntary basis. However incentives could be deliberately provided to mobilise the resources of unemployed members of local communities to enhance their provision.

For example a tiered kind of unemployment relief could be structured with a basic payment (for those opting out of such participation) that would be less than the current rate. However for those opting in, the basic payment could be progressively increased depending on the level of commitment.

The financing of such a scheme could come from a number of different sources.

With the cut in the basic rate, some financial resources would thereby be freed for supplementing payments to "active" unemployed. Also a concerted effort should be made to tighten up on present abuses in the social welfare system where over 10% is paid out on fraudulent claims. Savings made here could then be available for these other purposes. Also I can see no reason why the EU could not include such schemes in payments for its Social Fund. Indeed if schemes were in place the Government could perhaps have already achieved a commitment from Brussels for funding!

Some of the proposed initiatives would perhaps overlap with community based employment schemes promoted by FAS. So it would make sense therefore to promote greater liaison as between local based community promoters of work schemes and FAS representatives, with perhaps some of its financial resources diverted to fund viable proposals.

Finally once the positive benefit of such schemes becomes more apparent, it would then be possible perhaps to raise further money through voluntary contributions from participating communities.

One of the negative side effects of market based activity - based on quantitative criteria amenable to monetary measurement - is that qualitative considerations can thereby be easily devalued. Thus the all important social "glue" that cements communities through a shared common purpose can become significantly lost.
So from this perspective proper recognition of this non-market activity could even help to revitalise communities thereby lessening the alienation and futility that can sow the seeds for serious crime and social disturbance.

Also through focusing on the inherent value of work - presently accepted as non-market - that opportunities to convert many of these later into market form would thereby arise. In other words an alternative type of enterprise culture could be fostered.

Realistically however even with the support (that presently is so greatly lacking) these could only hope to ameliorate some of the problems caused by unemployment. They are not meant to replace existing approaches but rather to supplement them to a certain extent.

In a time when employment opportunities are few, work sharing practices again make sense with the hope of spreading out what is available in a more equitable manner.
Again too much should not be expected an in any case they are already taking place to some extent.

For example many college students - rather than seeking to directly enter the labour market on obtaining a primary degree - are staying on to do postgraduate work. Likewise early retirement schemes in the public sector and the threat of possible pension reductions in future years are enticing many to retire before the mandatory retirement age. In addition facilitating those who might be happy - say for family reasons - with a 3 day or 4-day week - could also reduce the pressure to cut costs in the public sector through better deployment of labour.

In the current circumstances therefore the Government should further facilitate such practices through modest additional financing of extra college courses, further early retirement options and encouragement of more flexi-time in the public sector.

However though in theory work sharing seems a very simple concept, in practice there are many difficulties with its implementation (especially in the private sector).
So though possibly making some contribution, in itself it does not offer a solution to the problem.

Though I am well aware of the perilous financial situation of the country at the moment, I would also recommend some special purpose investment by the Government that would stimulate economic activity while providing much needed jobs.

I have suggested before an acceleration of the school building programme as one appropriate way of achieving this goal.

Unemployment is particularly high in the construction industry. Also favourable social and political benefits would arise from decisively tackling the issue, where lack of sufficient action in the past has caused widespread frustration.
Also the Government would be in an ideal position to enforce very strict terms ensuring that such work would be done at very low cost.

Now one could argue that this would increase Government expenditure. However there would be several compensating benefits to the exchequer from additional economic activity, associated multiplier effects throughout the economy and reduced unemployment. So the net cost of such investment could be surprisingly modest.

Meanwhile it would make a valuable contribution in terms of social infrastructure, providing much needed hope at a difficult time.

Though performance here did indeed appear very impressive during the Celtic Tiger years, it was built on artificial conditions that cannot be repeated.

Unfortunately the legacy of the Celtic Tiger years is that we have now created a high cost economy with unsustainable work practices (where unions still enjoy considerable power).

Though of course it may not appear popular (or even compassionate), the key guiding principle for long term recovery should be the desire to restore a level of competitiveness (stronger than most of the developed economies with which we deal).

This indeed involves much more than wage costs. However the fiction - still unconvincingly maintained by union leaders - that wage costs are somehow not important with respect to sustaining competitiveness, needs to be challenged. Hopefully, the present testing environment in the economy will bring about a much needed conversion in mentality.

Workers of course have rights that need to be respected by employers. However the long term interests of both are in fact best served through a mutual commitment to competitive work practices.

Just to give one example. SR Techics who employed more than 1100 skilled aircraft maintenance personnel at Dublin Airport - left in the end largely due to the high costs that pertained here. It also did not help that this strongly unionised group of workers had been involved in the past in damaging industrial disputes leading to the loss of valuable contracts.

Now suddenly in the changed environment Michael O'Leary - formerly the "bete noir" of unions - is receiving total support from these now unemployed workers in his attempt to create 300 jobs at Dublin airport!

It is not alone high costs but also frequently the poor quality of service delivered that constitutes a major problem. Again this is a legacy of the madness of the Celtic Tiger years when for example in construction, demand was so buoyant that little attention was often given to acceptable quality standards! So this is another horror that is likely to surface in the coming years as more and more residents experience fundamental structural problems with their expensively acquired properties! Another recent example of the same problem is provided by the dreadful state of so many roads that are now full of dangerous pot holes following the freeze up in January! Though the cost of building these these roads was excessive to start with, councils are now faced with heavy bills in the attempt to provide a temporary patch-up solution. So even when recovery begins to take place in the Irish economy, it would make eminent sense to deliberately maintain cost increases below growth for some time so as to enhance competitiveness. Indeed this should be the real boast of the Government in years to come in being able to sell Ireland as the most competitive place to do business (in Western Europe)!

As regards more specific suggestions, while accepting that the multinationals will play a considerable role here for some time to come, we need to develop indigenous strengths that will give us an international competitive advantage.

Agriculture and the food industry have traditionally been extremely important to the economy. With consumers increasingly fussy regarding health standards, we should trade in on our traditional "green" image, guaranteeing quality food produced to the highest standards available. In particular we could greatly enhance the role of the organic sector (which has been comparatively neglected).
Considerable opportunities also exist perhaps for activity abroad with Irish food companies offering financial support to organise food production in less developed economies. For example the Ukraine at present offers great opportunities here, so potentially this route could lead to a much greater role for Irish food multinationals.

Tourism likewise has been an important industry historically here (with high employment potential) that unfortunately has suffered a relative decline in recent years.
Much of the problem here is due to the high costs that now pertain. So cost competitiveness is vital in terms of restoring this sector.

And Michael O'Leary is right! The present Government policy on air travel is very misguided. As an island economy on the fringe of Europe it makes eminent sense to encourage more visitors here through an especially low airport cost regime. Indeed I see no reason why we should not aim to market the economy on the basis of the lowest airport charges in Europe! However achieving this would require a major sea change in current policy and its protection of high cost operators (such as the DAA). So easy and cheap access with respect to air (and sea) travel could significantly enhance both tourism and business flows alike.

The most prominent high tech sectors in Ireland are IT and chemicals/pharmaceuticals. It is perhaps here that the best possibilities in future years arises for generating employment. In fairness the indigenous IT sector has already achieved notable successes. However opportunities are still being missed. One obvious problem is the slow pace of broadband provision. Again this is an area that should have achieved priority years ago. However even at this late stage much could be done to quickly improve the situation. Another problem is the lack of sufficient IT skills generated through the educational system (reflecting a lack of emphasis on science and mathematics at the earlier secondary school stage).

One interesting example of what could be done was raised on Frontline last night where we were told that Ireland has already - unknown to most - acquired a prominent position with respect to online gaming. The suggestion was that some major tax incentive such as total remission on profits generated in this area here could help to greatly increase such activity and consolidate our pre-eminent position.

And the varied opportunities provided by internet related applications are unlimited.

Here is a suggestion that I would make. At the moment we have far too many overpaid special advisors to Ministers (essentially acting as spin doctors). The number here should be greatly reduced and replaced by a mixture of advisors and travelling ambassadors with respect to new employment opportunities that could be opened up by the Internet and other technologies.

I was reading last week that Ireland is now the largest exporter of medical products in the world (though the figures here may be somewhat artificial). So once again it makes sense to specialise at an indigenous level in medical research and development. Indeed there have been several impressive research breakthroughs here already with potentially huge commercial implications. So it seems to me that this is an obvious area of specialisation in future years (with enormous potential).

Though Ireland is a member of the EU, indigenous trade with EU countries (apart from the UK) still remains quite limited. Indeed it is no accident that our strongest ties are with the UK and the US (two English speaking countries).
So in many ways we are limited by our inability to speak other languages.

Therefore I think it should be a goal of policy to encourage from an early age in school studying at least two other European languages. Personally I would suggest removing any compulsory requirement for Irish. Present policy has not worked with negative consequences for further language involvement. Paradoxically with a more open approach, genuine commitment to Irish could actually be strengthened! With better language skills we would naturally better assimilate ourselves with other European countries (and cultures) which could greatly enhance trade and employment opportunities. Even in the most direct sense, many jobs in the call centres require multilingual skills which at present cannot be provided by Irish workers.

A major change with respect to traditional energy policy is now required in Ireland. At present we are greatly dependent on both oil and gas for the great proportion of our energy needs (most of which is imported).

A significant opportunity now presents itself therefore with respect to the development of alternative energy sources (especially with respect to renewables such as wind and water). Again if we truly committed ourselves to this, there is no reason why we should not aim at becoming market leaders in the future (in at least some of these energy market niches).

At a general level a lot more needs to be done in Ireland to foster a true enterprise culture. Though significant strides have been made in recent years unfortunately the bulk of such enterprise was associated with unsustainable property development. If more of this enterprise was directed at providing necessary infrastructure it would have helped better with future development. Unfortunately - greatly assisted by misguided Government incentives - we have created a huge surplus of unwanted commercial and housing development leaving enormous negative financial implications.

I have no doubt that the Irish have inherent entrepreneurial abilities well suited for imaginative new proposals.
The secondary school curriculum needs to be revised in a more practical direction with entrepreneurial studies introduced at an early stage. Also competitions that foster and regard new ideas should be increased. In this respect I welcome very much the recent presidential initiative "Your Country your Call" which is creating a nationwide competition to come up with entrepreneurial ideas that have the potential to create significant numbers of jobs. Finance and assistance will then be made available to bring the two best ideas to commercial reality. And perhaps others ideas not considered as potential winners will in fact provide the real success stories of the future.

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