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The labour market: getting people into work.

The Irish labour market is undergoing a severe adjustment following the sharp fall in output, which has been concentrated on labour-intensive sectors. This has led to a large reduction in employment and high levels of unemployment, despite some outward migration. The labour market in Ireland is flexible in terms of regulation and widespread evidence suggests some reduction in nominal wages is already taking place. But, there is a serious risk that joblessness in the short run will translate into a permanently higher level of unemployment due to the combination of relatively high unemployment benefits for low-skilled workers and, more importantly, weak activation measures. Although some measures have been taken in response to the rise in unemployment, greater encouragement and support should be provided to help the unemployed get back into work and conditionality should be stricter. For the longer run, female participation would be facilitated by removing obstacles in the tax-benefit system; lone parents would be helped by greater support and a stronger requirement to work; and more systematic efforts are required to ensure that disability is not a pathway to inactivity.

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Labour market conditions have deteriorated rapidly: employment has fallen by over 7 per cent since the peak and unemployment has risen from an average rate of 4.5% in 2007 to close to 12 per cent. (1) Further labour market deterioration is inevitable in the short term. Getting people into work should be the main priority, because high short-term unemployment may lead to permanently higher joblessness. If this is to be avoided, the level of unemployment-related benefits needs to be reduced to improve work incentives and, more importantly, effective activation policies should be strengthened to help to maintain pressures on pay, as well as preventing the long-term unemployed from becoming detached from the labour market. In the long run, raising participation among groups with weak attachment to the labour market would bring more people into work and boost living standards.

The Irish labour market is relatively flexible and supportive of long-run growth. Prior to the downturn, low unemployment and employment gains were impressive by international standards: the number of people with jobs increased at an average annual rate of 3.2% over the period 2001-07, and the share of the working-age population participating in the labour force rose to 64.1%. The unemployment rate averaged just 4.5%, among the lowest rates in the OECD. There was a substantial and unprecedented net inflow of foreign migrants. Although average hours per worker fell over the period, the offsetting rise in employment rates was sufficient to raise labour utilisation. Labour productivity growth, at an average annual rate of 2.3%, was strong and real wages rose substantially. This nevertheless represented a slowdown since the Celtic Tiger era.

Furthermore, real wage growth was less muted in this expansion than in the earlier period and unit labour costs grew more rapidly. Nevertheless, performance was strong by international comparison.

Short-term labour market adjustment

The economic slowdown has hit labour-intensive sectors

The contraction in output since 2007 has sharply reduced the demand for labour:

employment declined by 7.4% from the peak to the first quarter of 2009 and average hours worked by those in employment have shortened (Figure 3.1). The reduction in labour utilisation has been less pronounced than the fall in output, so labour productivity per hour worked has also fallen. As labour demand has slumped, the standardised unemployment rate has increased sharply from around 4.5% in late 2007 to reach 12.4% in August 2009. (2) The increase in unemployment has partly been attenuated by a reduction in the labour force, largely due to a fall in the participation rate of around 15 percentage points. The inflow of new migrants has slowed very sharply and the number of migrants in the labour force fell by 10% over the year to the second quarter of 2009, partially reversing the inward migration of recent years. Outward migration by those from the new member states of the European Union was particularly significant. The percentage point increase in the unemployment rate since the slowdown began has been the second highest in the OECD, with other economies that were heavily dependent on construction such as Spain and the United States also severely affected.

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Employment began to decline first in the construction and other production sectors with the number of workers peaking in the first half of 2007 (Table 3.1). In early 2008, the contraction of employment spread to other sectors including wholesale distribution, transport and finance. Employment in the construction sector has fallen by around one third since its peak, with reductions in employment of 5-7% to date in manufacturing, distribution services, hotels and restaurants. These reductions largely mirror the sectors most severely affected by the crisis, which are relatively labour-intensive such as construction. (3) These sectors were the main drivers of the rise in employment during the expansion: construction, finance and business services, and distribution and other services each accounted for around one fifth of the overall increase since 2003. The recent falls in industrial employment accelerate an already downwards trend since the peak in 2001. Employment in primarily non-market activities, such as public administration and health, accounted for a substantial part of the growth in employment in recent years and has continued to increase, although this is likely to slow or even reverse as public expenditure is restricted. The labour market situation has deteriorated much more rapidly for men than for women: the fall in employment for males has been more than twice as large and the male unemployment rate is now almost twice as high as for females. This reflects higher shares of male workers in sectors, such as construction, that have been most severely affected by the downturn. The impact on females may worsen, in the short run as reductions in employment spread to other sectors and in the longer run because real wages are falling and female labour supply decisions tend to be more sensitive to pay than for men.

Lessons from past slumps in labour demand

It is too early to say how the labour market will ultimately adjust to the economic downturn. Past episodes provide some guidance, although structural change and the specific features of the current situation necessarily make the comparison inexact. Adjustment can occur either through the extensive margin (number of workers) or the intensive margin (average hours worked). Adjustment on the extensive margin can be more costly because the firm-worker job match is broken and because it leads to unemployment, raising the cost and creating a risk of quasi-permanent exit from the labour market. Over the period 1983 to 2007, adjustment on the extensive margin explains almost all of the variation in labour utilisation in Ireland, a higher share than in a sample of other European countries (OECD, 2009). (4) Most of these adjustments in Irish unemployment can be explained by variation in the employment rate, although labour force participation also varies. Adjustment of average hours has played a modest role and been less important than for the average country in the sample. The overall volatility of the Irish labour market is also high over the cycle in comparison with other OEGD countries (Figure 3.2). This reflects the variability of production, which is likely to be higher in small economies which are less diversified in production and more exposed to international shocks. It also reflects policy settings that allow swift adjustment in the labour market. This combination of structural and policy factors is similar to that in Finland and New Zealand.

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Business-cycle sensitivity varies strongly across different workforce groups. Younger workers are more likely to be affected because of their limited labour market experience and seniority rules. On average across the OECD, older workers are one fifth more sensitive to the business cycle than prime-age workers (OECD, 2009). Turnover costs tend to be higher for more skilled workers and hence demand for low-skilled labour is more sensitive to the cycle. The share of younger workers (those aged under 25) in the labour force is around 15%, similar to that in the early 1990s but around 10 percentage points lower than at the beginning of the 1980s. The cyclical impact of this downturn on overall employment may therefore be less than in the 1980s. Total hours worked in some sectors are more volatile than in others depending on the cyclical variation in output and how much this affects labour demand. Firms that are more dependent on external credit find it harder to hoard labour. Labour utilisation in construction is the most cyclical across OECD countries followed by durable goods manufacturing and business services (OECD, 2009). In 2007, the share of construction workers in Ireland was around twice the OECD average, consistent with the relatively large adjustment in overall employment that has been seen subsequently.

In addition, the flexibility of the Irish labour market may have increased with the rising share of part-time workers, whose hours are easier to vary and who can be less costly to fire. Based on the definition of full-time work as being more than 30 hours in a usual week, 20% of workers in Ireland were in part-time employment in 2008. This share is around double what it was in the early 1990s, above the European average and similar to other English-speaking countries. More than one third of female workers are in part-time employment. Around one tenth of workers in 2007 were on fixed-term contracts, well below the OECD average. The limited use of such contracts is in part because flexible employment protection legislation has avoided the creation of a two-tier labour market seen in some other OECD countries. About 17% of the civilian workforce is self-employed, around the OECD average and with the share having declined by around one quarter compared with 20 years ago. Self-employed workers tend to have a less cyclical labour market position than other groups of workers, in particular because they are often in the relatively stable 25-54 age group (OECD, 2009a). This pattern might be somewhat different in Ireland because self-employment has been common in the construction industry and hence may be more severely affected by the current slowdown.

Flexible employment protection legislation should speed adjustment

The flexible regulation of the Irish labour market facilitates adjustment in the face of shocks: the OECD's indicator for the strictness of Employment Protection Legislation (EPL) suggests that Ireland is among those economies with relatively less strict EPL, alongside such countries as Australia and Denmark and markedly different from the euro area norm (Figure 3.3). Workers are entitled to redundancy payments of two weeks' pay per year worked up to a level of annual pay of around 30 000 [euro], on which employers receive a rebate of 60% funded by social security contributions and with a fund to pay out in the case of employer insolvency. Many private employers opt to make much higher payments. The legal minimum requirement is broadly twice as generous as the current scheme in the United Kingdom, which no longer provides a government rebate to employers. New legislation adopted in 2007 covering exceptional collective redundancies provides for longer notification periods. In addition, a panel determines whether certain proposed collective redundancies are motivated by replacing existing workers by lower-paid workers, although these provisions do not appear to have had a material impact on the operation of the labour market. In terms of adjusting employment following negative shocks, higher flexibility in employment regulation has two effects: the immediate increase in unemployment is likely to be greater because it is easier for firms to make workers redundant, but higher unemployment persists less because firms are not reluctant to hire again as the commitment is less costly. Econometric evidence suggests that less strict Irish EPL has only had a modest effect on joblessness compared with the European average (Duval et al., 2007). Cross-country evidence suggests that the main effect of EPL settings that do not restrict adjustment is to weaken the prospects of younger workers, although it may also leave older workers more exposed to changes in employment (Bassanini and Duval, 2006).

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Competitive product markets, which are encouraged by Ireland's relatively unrestrictive product market regulations (PMR), also help labour market adjustment by facilitating more rapid adjustments in activity. For example, low barriers to entry will help new firms to enter the market and begin hiring as soon as demand picks up. Other aspects of the Irish economy may, however, be more restraining of flexibility. In particular, inadequate infrastructure makes it harder to people to move to jobs located in other parts of the country, although recent progress is likely to have made such commuting easier. In addition, high housing costs and a limited private rental market can constrain movement over longer distances. This may be a growing problem to the extent that negative home equity makes it harder to move to a new job and this underlines the importance of banks allowing people to move with their existing mortgages.

A flexible job market is also helpful in achieving the best job matches throughout the economic cycle. Evidence based on panel data for 1995 to 2001 for workers aged under 30 suggests that job mobility rates are relatively high in Ireland, with close to 16% of workers experiencing a change of job between two years (Davia, 2005), somewhat below the rate in Finland, the United Kingdom and Spain but well above the rate of mobility in many continental European countries. The job mobility rate for the Irish workforce as a whole increased sharply from around 6.5% in 1995 to reach 13.5% by 2000 (Bergin, 2008): around a third of this increase can be explained by changes in the characteristics of the workforce and it is also likely that strong labour market conditions encouraged people to change jobs by increasing the number of vacancies, widening opportunities to find a better job and reducing the risks of moving jobs. This flexibility will also support economic growth by making it easier to adjust different activities, thereby contributing to creative destruction and the creation of new, more productive, enterprises.

High levels of unemployment will be hard to cut

International evidence suggests that a short-term rise in unemployment typically leads to an increase in long-term joblessness, particularly in European countries, and it can therefore be difficult to reduce unemployment quickly following a recovery. The Irish experience in terms of unemployment has been different following each of the two most recent serious downturns (Figure 3.4). The unemployment rate remained above 10% for about a decade following the recession of the early-1980s, despite a large outflow of workers to other countries. By contrast, unemployment fell very sharply following the early 1990s slowdown: the unemployment rate dropped from a peak of 16% in 1993 and fell fairly consistently at a brisk pace to reach 4% by 2000. Such a large and sustained fall in unemployment is remarkable in the experience of OECD countries. This followed important labour market reforms, such as reducing tax rates and reforming unemployment benefits. These included lowering unemployment benefits relative to wages, introducing conditionality and doing more to monitor and sanction the unemployed. In addition, wage restraint appears to have played a particularly important role (Blanchard, 2000). Although output recovered more strongly from the 1990s slowdown than in the previous cycle, the number of jobs created for each additional unit of output accounts for a much larger part of the difference in employment creation in the two recoveries. The central question now is whether the swift decline of unemployment along the lines of the 1990s can be repeated; this depends on wage developments and effective policies towards the unemployed. These issues are interrelated, as the downward pressure on real wages falls when the unemployed compete less intensely for jobs. The following analysis suggests that wage flexibility will contribute to resolving the high level of unemployment, with evidence that nominal wages may already be falling, but that policies towards the unemployed need to change in order to avoid persistent joblessness as the economy recovers.

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Variation in the number of unemployed people depends on the inflows into unemployment from work or outside the labour force and outflows back into employment or inactivity. Larger inflows or slower outflows raise the average duration of spells of unemployment and thereby raise the number of unemployed, in particular long-term unemployed. Analysis derived under some assumptions from data on average unemployment spells from 1983 to 2007 suggests that Ireland has had both relatively low inflows into and outflows from unemployment on average, a pattern more typical of continental European than English-speaking economies, and both have been equally important in explaining variation in unemployment (OECD, 2009a). (5) At times, emigration has also provided a very important exit route from joblessness: over the decade of persistently high unemployment up to 1994, cumulative net migration amounted to around 8 per cent of the labour force.

Lower wages are essential but the necessary adjustment mill be difficult to achieve

Lower product real wages would underpin stronger demand for labour through improved competitiveness, thereby increasing the level of employment and lowering unemployment as occurred in the early 1990s recovery. Widespread evidence suggests that wages are falling fast in Ireland. However, the required adjustment is large. The amount and speed of wage adjustment will depend on how far unemployment or the fear of job losses influences pay. This depends in turn on labour market institutions and policies.

Irish nominal wages appear already to have begun to fall, although the official data only show average hourly earnings in many sectors as being fairly flat up to the end of 2008 (Figure 3.5). The fall in financial services has been marked. The reliability of some earnings series may be imperfect and new statistics have already been introduced in some areas. (6) In the public service, the Pension Levy reduces pay by around 7% on average. Anecdotal evidence points towards larger falls in wages in the range of 5 to 10%, although this may relate more to the extent of cuts by firms that have reduced wages rather than the overall changes in wages including firms that have maintained or raised pay rates. The Irish Business and Employers Confederation (IBEC) Business Sentiment Survey for the first quarter of 2009 (taken in February) showed that two-thirds of the sample intended to implement pay freezes in the next three months, while a fifth planned to cut wages and a substantial number were considering cuts. A survey for the Irish Small and Medium Enterprises Association (ISME) based on 400 of its members showed that, over the six months to March, half of the sample had implemented a pay freeze and 41% had cut wages with an average reduction of 13%. Most construction firms had cut wages and around 40% of services firms had implemented reductions.

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Nominal wage reductions of this size are essentially unprecedented in the experience of OECD countries (Box 3.1). Even rapid and substantial falls in real wages on this scale are rare and have typically occurred as the result of inflation exceeding the growth of nominal wages. Wages deflated by the GDP deflator fell by 7% in Finland in three years after 1990. Most other instances of falling real wages occurred around times of unstable and rising inflation, so that ex ante nominal wages were sufficient to match ex post increases in prices. Falls in real wages are rare because rising trend labour productivity implies that wage increases on average are positive. Real wage adjustment therefore is more common through declines in real unit labour costs. The most prominent recent example of this among OECD countries is Germany, where real unit labour costs declined by 10% in the first seven years of this decade because real wages remained relatively flat as productivity increased. This is the same mechanism by which Ireland regained wage competitiveness in the mid-1990s.
Box 3.1. Falling nominal wages are rare in OECD countries

Aggregate nominal wages have fallen only on rare occasions in OECD
countries: money wages fell for about a year in Finland in 1992 and
the Netherlands from 1997, declining by around 3% and 5%
respectively. Wages in Japan fell over a six-year period by almost
10% from their peak in 1996, declining at a year-on-year rate of
over 3% at times and during a period of sustained price deflation.
The frequency of falls in nominal wages among developed economies
has increased somewhat as trend inflation has fallen. There are
number of reasons why nominal wages cuts may be resisted. The
economic literature suggests that firms fear that cutting nominal
wages will damage worker morale and people can be averse to nominal
losses in a wide range of economic situations, including the labour
market. The effect this has on employment may, however, be
attenuated by other factors. In particular, firms may anticipate
that it is binding and so temper nominal wage increases to lower
the possibility of future reversal (Elsby, 2006). The effect of
cutting nominal wages may also be to change the distribution of
benefits around a worker-firm job match, reducing profits but not
leading to reductions in employment. Analysis based on comparing
the median with the average year-on-year change in wages in
household-level data to detect evidence of truncation of the
distribution around zero suggests that nominal wage rigidity in
Ireland was low compared with other OECD countries for the period
1993 to 2001 (Dickens et al., 2006). Real wage rigidity was
moderate by international comparison using the same analysis,
although the strong growth in Ireland and higher average inflation
over the sample might limit the relevance of these comparisons.


The role of Social Partnership in achieving wage flexibility is now unclear

In the past, wage formation and restraint in Ireland has been helped by the Social Partnership process. Tripartite national pay negotiations have taken place every three years under successive social partnership agreements since 1987. The agreement is negotiated between the Department of the Taoiseach; employers represented by the Irish Business and Employers Confederation (IBEC) and the Construction Industry Federation (CIF); and the Irish Congress of Trade Unions (ICTU), which represents over 40 trade unions and around a third of employees. Wage agreements under partnership are extended to all industries and employers, not just those represented at the negotiations. But, the agreements are voluntarist: they are not legally enforceable. Unions can reach any other agreement with employers at the local level. Employers may also invoke an "inability to pay" clause and, in case of dispute, unions can challenge this in the Labour Court. In practice, wage rates agreed in Social Partnership have acted as pay norms in the private sector in recent years, although the relationship to increases in aggregate pay has not been particularly close. In addition to limited legal enforceability, the impact of negotiated wages in the private sector is constrained by low unionisation: in 2007, only a little over one fifth of workers belonged to a union outside the health, education and public administration sectors. By contrast, union membership in these sectors was 58% so partnership has had a key role in setting public-sector wages.

The current partnership agreement, Towards 2026 (Department of Taoiseach, 2006), was concluded in June 2006 with the pay agreement renewed in autumn 2008. The private sector dement of the deal remains in force but appears to have been sidelined through large-scale reductions in pay using the full flexibility provided by the partnership system, although some firms and sectors have continued to apply the negotiated increases. In the public sector, wages have been frozen and a Pension Levy introduced unilaterally after consultation with the social partners failed to achieve agreement on these issues. This fragmented situation creates inconsistencies between the pay rates of different workers, with some being awarded negotiated increases while others receive very much less but to varying extents. This may create unhelpful tensions. While some previous partnership deals were able partly to trade wage restraint for support for disposable incomes from cuts in taxes and increases in social benefits, this approach would not be possible in the current fiscal situation and might have unwanted long-run fiscal implications. Furthermore, in the run up to the current slowdown, the partnership process did not prevent a misalignment of wages with productivity and an erosion of competitiveness (Honohan and Leddin, 2006). (7) One problem is that union coverage is unbalanced between the private and public sectors. These agreements therefore risk extending a public sector deal to the entire economy. This carries particular risks as productivity is difficult to assess in the public sector and therefore the bargained wage that results may not be closely linked to the factors relevant for the private sector.

This raises the question of whether the Social Partnership process remains useful in the present circumstances, particularly as regards wage setting. Although it is valuable to have dialogue between the social partners, there may be other ways of structuring this relationship. The current circumstances are undoubtedly a severe test of any arrangement. In terms of wage-setting, international experience suggests that either highly centralised or very decentralised bargaining can be effective: centralised bargaining encourages social partners to fully consider the impact on employment of the agreed wage level, while very localised bargaining is close to the market outcome (Calmfors, 2993). There is a case for abandoning the Social Partnership framework altogether, while providing other fora for dialogue between the social partners. If it is retained, there are a number of options for reforming the partnership process:

* A narrower partnership deal either excluding pay negotiation altogether or excluding negotiation over private sector pay, at least in internationally competitive sectors. Under such a system, market-determined wage developments might act as a guide to pay in the sectors covered by the pay deal, although it should not necessarily be a benchmark given differences in productivity growth.

* A wider partnership process that deals with pay alongside other factors that contribute to economic competitiveness.

* Returning to the original partnership process focussed on pay and related issues, rather than wider issues of economic and social development.

There are few general conclusions about the effectiveness and design of bargaining institutions across countries, (8) but it is important that they work well and keep the overall wage level at an appropriate level. The structure of the Irish economy has changed considerably since Social Partnership was introduced and, within monetary union, there are strong external incentives to discipline wages and inflation that did not exist previously when there was the possibility of devaluing the currency. In addition, the nature of employment has shifted away from basic manufacturing to higher value-added production in industries that are not heavily unionised.

The minimum wage may become a more important constraint for low-skilled workers

A minimum wage can limit downwards wage flexibility if it is set at an inappropriately high rate relative to its objective of achieving decent minimum living standards. This is the first serious downturn where Ireland has had a minimum wage, as it was introduced in 2000. It is currently 8.65 [euro] an hour with reductions ranging from 10 to 30% for those under 18, people in their first year of work and trainees. This is the second highest in the euro area (Figure 3.6). But, the proportion of full-time workers on the national minimum wage has been very low at around 3% (Eurostat, 2008). While firms may have been able to sustain high rates of pay when demand was strong enough for high labour costs to be passed on to customers, this will be more problematic when demand is weak. The high level of the minimum wage by European standards is not itself a major issue for international competitiveness, but it could be a problem if it is set at too high a level to clear the market for unskilled labour. This depends in part on the level of unemployment benefits, as discussed below.

As nominal wages fall significantly, it is important that the minimum wage is adjusted to maintain its value relative to market wages, thereby avoiding further downwards pressures on demand for low-skilled labour. In addition, this should also be reflected in the level of social welfare payments so as not to reduce the incentive to work for those with low wages. Currently, around one-tenth of workers earn less than 10 [euro] per hour: these low-wage workers are the most vulnerable to the minimum wage becoming binding as overall wages fall. This proportion is around one third in parts of the services industry. The national minimum wage is determined by the government on the basis of a recommendation either from the Labour Court, a body composed of both industry and union representatives, or agreed by employers and trade unions in a national pay agreement. The government must take the economic and labour market effects into account when evaluating the recommendation and explain to parliament if the proposal is rejected. This process should be modified so that the minimum wage is reviewed on an annual basis to better reflect changing economic circumstances. Some sectors, such as hotels and hairdressing are covered by Employment Regulation Orders, agreements drawn up by sector Joint Labour Committees and which can be registered with the Labour Court and extended over the sector as a whole. Sectoral minima set in this way are typically slightly higher than the national minimum. This mechanism can also determine other elements of working conditions, which can have a substantial impact on labour flexibility and costs, such as overtime pay or Sunday working arrangements. In other sectors, such as construction, the sector minimum is set through a Registered Employment Agreement (REA). These collective agreements can also be registered with the Labour Court and can become legally enforceable. Some of the minimum wages that result are high, such as 18.60 [euro] per hour for craftsmen in the construction sector. The arrangements for sectoral minima should be reconsidered. Un-coordinated arrangements in different sectors create a risk of overall pressure on wages. In addition, they can lead to be wages and conditions that are uncompetitive in particular sectors. This risk is heightened where the minimum wage is negotiated and then extended to a wider group of workers and firms. The government is considering the introduction of an "ability to pay" clause to REAs.

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Policies should do more to encourage the unemployed to get back to work

Unemployment will inevitably run at a high level in the coming quarters. The key challenge is therefore to ensure that this level of joblessness does not persist further ahead. If workers become discouraged or detached from the labour market, unemployment will remain high for a prolonged period and the downward pressure on wages will be reduced, thereby prolonging the economic adjustment. Avoiding this outcome requires increasing the incentive to work by reducing the level of unemployment benefits, stronger activation measures and effective active labour market programmes.

Incentives to get back to work should be improved

Unemployment-related social benefits should aim to mitigate the impact of losing a job, both by providing short-run support for household income and appropriate incentives to the unemployed to return to work. There are two social benefits associated with unemployment in Ireland: (9) Jobseeker's Benefit (JB) is a social insurance payment tied to the recipient's past Pay-Related Social Insurance (PSRI) contributions, while Jobseeker's Allowance (JA) is a means-tested safety-net payment. For an unemployed worker coming from a full-time job, the payment under either scheme is around 204 [euro] per week for a single person in 2009. (10) The main difference between the two payments is that the JA is subject to a means test and a habitual residency condition, while eligibility for the JB is based on social security contributions paid. (11) The JB is payable for up to 12 months, reduced from 15 in the Budget for 2009. (12) Taken together, unemployment-related social payments for an individual with a given set of family circumstances can effectively amount to an indefinite fixed payment, unless there are sufficient other resources in the household for means testing to apply on the JA. The overall level of support is higher when a range of other associated benefits is taken into account. These include housing supports and the Medical Card, which entitles recipients to free generalist and hospital treatment.

The likely impact on incentives to work of the level of out-of-work payments can be assessed using the net replacement rate, the ratio of income including benefits while unemployed compared with work income. For a worker on average wages, the net replacement rate when a person is first unemployed is substantially below the OECD average and generally lower even than in other countries that have similar social systems. By contrast with some continental European countries where initially pay outs are closely related to the level of previous earnings, payments under both the JB and JA are basically the same irrespective of earlier wages and so the net replacement rate is higher for lower levels of earnings. For a worker earning 67% of the average wage, the net replacement rate is higher than for a worker on average wages but in Ireland is well below the OECD average and benefits in comparable countries. However, the current level of unemployment benefits is the result of a sustained increase in benefit levels: from 2002 to 2007, the real value of benefits increased by almost a half and the replacement rate rose substantially (Figure 3.7). Furthermore, taking into account the projected fall in wages together with the Income Levy and other increases in taxation, the replacement rate would increase substantially further even if unemployment benefits were maintained at the current level in nominal terms. Current policy settings therefore imply that the replacement rate could begin to reach relatively high levels for those with low earnings potential and even for those on average wages. There is a risk that incentive to work will be weakened as a result. At the least, unemployment benefits need to be adjusted in line with falling net labour market earnings. Unemployment benefits for those aged under 20 were halved in 2009, reducing the replacement rates for younger workers dramatically, but this measure is only a small part of ensuring that unemployment-related social benefits are at an appropriate level.

In Ireland, unemployment benefit payments remain basically unchanged for as long as people are unemployed. The main exception is where claimants have sufficient resources to lose support due to means-testing under the JA applying when their JB entitlement ends. It is fairly unusual among OECD benefit systems for payments not to fall, the longer people claim: in most countries, benefits are cut as the unemployment spell lengthens until the social assistance minimum is reached. These systems are therefore able to combine greater income insurance in the short run through more generous benefits, while eventually giving a stronger incentive to return to work. It is also useful to reduce unemployment benefits with duration because prolonged periods of inactivity can lead to a loss of skills or employability, lowering the real wage that can be expected from a prospective employer. Reducing unemployment benefits with time matches this pattern of reservation wages. Indeed, by getting people back to work faster, such reductions in benefits can actually lead to a smaller overall reduction in wages for those returning to work. An important consequence for Ireland of the fairly fiat time-profile of benefits is that the net replacement rate, while currently relatively low for initial claimants, is around the OECD average or higher for the long-term unemployed. This is especially true for those with lower earnings potential, such as the low-skilled (Figure 3.8). A step has already been taken to address this problem through the reduction in the JA for 18- and 19-year olds, which has been cut to 100 [euro] for a single person.

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The intensity of the incentive to move back to work and the type of work sought depend on the marginal gains of moving from social benefits to earning income from work. This can be measured using marginal effective tax rates (METR), based on detailed modelling of the tax-benefit system which takes into account all forms of taxation and welfare payment. (13) Although the importance of basically flat-rate payments in the Irish social welfare system tends to reduce disincentives to work at the margin that are typically associated with means-testing, there are nevertheless important elements of means-testing within the benefit system. In particular, the JA is means-tested at household level. METRs can be very high for some situations and some levels of earnings if people return to work.

Many of these problems arise from benefits other than the principal unemployment benefits. Firstly, the loss of secondary benefits when moving to employment or higher income can be substantial. Since 2003, the Medical Card can be kept for three years after returning to work, which eliminated a strong disincentive. By contrast, Rent Supplement remains in place, although reforms were introduced in the 2009 Supplementary Budget and individuals can work up to 30 hours. The Supplement is withdrawn at a rate of 100%, so METRs are extremely high over this range for the 85 000 households who receive it. (14) Secondly, the interaction of various means-tested benefit components can create high METRs, particularly for weekly earnings around half the average, and so net incomes do not vary much over quite a wide range of gross earnings and METRs can be very high at some points. These effects are part of a wider problem for the supply of labour with the incentive to increase household hours worked often limited on below-average wages or for part-time employment. For example, the in-work Family Income Supplement, which is paid to a small number (30 000) of families and requires a minimum of 19 hours work per week, has a 60% taper rate over a wide range. These high marginal effective tax rates may act as barriers to seeking more or better paid work for some people, but may also hinder the return to work altogether by discouraging the kind of part-time work that might keep workers close to the labour market in the absence of full-time work.

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The design of such means-tested benefits inherently involves a trade-off between the taper rate at which benefits are withdrawn and the number of people whose net incomes are affected. The wide range of different benefits and schemes, which are not integrated with each other, worsens this trade-off by introducing a complex range of taper rates at different points in a somewhat arbitrary way: a simpler system could help to avoid "benefit traps" due to very high METRs by allowing withdrawal of benefits to be spread more evenly across different situations. Furthermore, the high level of the replacement rate on basic benefits implies that more support is required to provide strong net income gains from employment for those with high benefit incomes already. Some benefits continue to be received at levels of income close to working full-time at the average wage. The system and the interaction of benefits should be thoroughly reviewed and a more coherent system developed. A further difficulty is that the complexity of the system makes it difficult for people to understand it and make good decisions about how much to work. Some of the necessary calculations are complicated, while others require the Department for Social and Family Affairs' own rate tables to work out entitlements (OPEN/EAPN Ireland, 2005). For example, the take up of the Family Income Supplement is relatively low compared with the very large number of households that should in principle benefit. If welfare rates overall are cut, a high priority should be given to raising take up of benefits targeted at families who need them the most.

Activation measures are ineffective

The strength of the incentives to accept job offers and leave unemployment depends on the conditions attached to receiving unemployment-related social benefits, as well as their level. If mutual obligations conditionality is stricter, higher levels of benefits may be compatible with a given a level of unemployment than would otherwise be the case. The National Employment Action Plan (NEAP), established in 1998, aims to prevent long-term unemployment through activation. The NEAP appears to have had good outcomes, against a favourable economic background, according to initial evaluations and has contributed positively to reducing unemployment by lowering the inflow into long-term unemployment and substantially increasing the rate at which the long-term unemployed get back to work (Grubb et al., 2009). These initial effects appear to have been achieved in a highly cost-effective way (Indecon, 2005), although there is a need for more up-to-date econometric analysis of the NEAP. This is subject of on-going research by the ESRI. Despite the apparent success, there appear to be weaknesses in how conditionality is implemented and thus Ireland is in a weaker position than many other OECD countries in confronting the rise in unemployment.

One striking feature of the Irish labour market, highlighted in Grubb et al. (2009), is the number of people claiming unemployment benefit, even during the years of apparently full employment (Table 3.2): in most countries, unemployment as measured by the Labour Force Survey (LFS) is higher than the number of those claiming benefits (referred to in Ireland as the Live Register) because the conditions around claiming benefits are stricter than those who report themselves as being unemployed according to the LFS definition. By contrast, in Ireland, benefit claims are much higher than the number of people reporting themselves as unemployed. Even at the top of the economic cycle, 7% of the Irish labour force was receiving unemployment benefits. It appears unlikely that the whole of this phenomenon can be explained by differences between how the two measures are defined, such as those working very short hours, having a larger effect in Ireland than elsewhere. However, some of the high rate of claims on the Live Register could be due to inactive people signing on to claim pension entitlements. In any case, the large number of Live Register claimants than unemployment raises a question about whether the entitlement to unemployment benefits is appropriate.

To claim unemployment benefits, workers must be genuinely seeking full-time work. That is, willing to accept any reasonable offer of suitable employment or training, or using all available services and supports to enhance their chances of getting a job. Claimants are generally required to sign on once every one or two months but can be required to do so weekly. This requirement has been enforced more strictly as unemployment has increased and there has been a move away from electronic communication so that the unemployed have to be present in person. The rapid increase in unemployment has put considerable pressure on the administration of benefits and has created a considerable backlog. This is further complicated by the Supplementary Welfare Allowance, which is available while claims are processed, but is administered by Community Welfare Officers, who are part of the health service, rather than the main social welfare administration.

Under the NEAP, all unemployed for more than three months are automatically referred from the Department of Social and Family Affairs (DSFA) to the Training and Employment Agency (FAS) to undertake an interview and identify a personal path to re-enter the labour market, although they are advised to do so after one month of unemployment. Four options are available: a job, a place on a training/education scheme, a place on an employment scheme or work experience programme, or referral to the Local Employment Service (LES) for more intensive guidance or counselling. Those who are registered with the LES have the option of staying. The initial three-month period is long compared to the requirements in most other social welfare systems, which either require immediate full engagement with activation measures or apply a more limited requirement for the three-month period in terms of allowing more flexibility about what job offers people are obliged to accept. This referral leads many people to cease claiming unemployment benefit. This deterrence effect is surprisingly strong given the apparent lack of strictness of the conditionality since FAS has no power to cut benefits other than to refer the case back to the social security administration. However, around one quarter of those invited to attend interview in 2007 came off the Live Register without going through the interview process. This might partly reflect people getting a job anyway, as about half of these people left the Register for employment or education (Grubb et al., 2009), but may also be due to the dissuasive effect of being called to interview. If people remain unemployed, they do not face frequent follow-up compulsory interviews; the overall number of reviews conducted, relative to the number of unemployed, is far lower for example than in the United Kingdom. Compulsory interviews with benefit claimants should begin earlier during a spell of unemployment and be more frequent thereafter.

It is unclear how systematically the Department of Social Welfare responds to information from FAS. One difficulty is that communication between the two agencies is constrained by current IT systems so that the DSFA may not have a full picture of a client's situation and so may find it difficult to justify applying sanctions (Grubb et al., 2009). Furthermore, extensive appeals are possible before benefits are cut. While the NEAP process operates as intended for most people with the unemployed either going to employment or training or taking up further programmes, there are a number of gaps through which the unemployed can fall: not being referred by the DSFA to FAS, for example in the case of a second spell of unemployment; "no-shows" who should have attended interviews but did not; and those who attend the interview but remain unemployed and are not receiving on-going support. Furthermore, the penalties for not meeting obligations are not particularly stringent. Benefits can be withdrawn for up to nine weeks, around the norm among developed countries but much less stringent than in Australia, Spain or the United Kingdom, where sanctions can be applied for over three months (Hasselpflug, 2005). In most other OECD countries, participation in training or employment schemes can be ultimately made obligatory, while only training can be compulsory in Ireland. Sanction rates in Ireland have been very low: in 2006, only a handful of sanctions were applied for refusal to accept suitable work or engage in an employment programme. The sanction rates for insufficient job search are also well below typical experience in OECD countries (Grubb et al., 2009). This would be consistent with FAS counsellors making little use of unilateral referrals to employment programmes, in line with the policy of developing an agreed strategy with clients. This approach carries the risk that the unemployed can successfully avoid activities they do not wish to undertake and that sanctions cannot be applied. The requirement to work should be enforced more strictly. While it is useful to support those voluntarily trying to enter work, more attention is required on those reluctant to seek work, particularly given that the net replacement rate can be relatively high for those with low earnings potential. Those who do not meet the required conditions should systematically lose their benefit entitlements. Overall, many of the conditions that ensured the early success of the NEAP were relaxed in recent years with not only higher benefits but also less emphasis on conditionality. The result is a system that falls short of the kind of mutual obligations approach achieved in a number of OECD countries (Grubb et al., 2009). A major change in culture and practices will therefore be needed, even if with weak labour demand, these conditions need to be enforced realistically in the short run. However, by creating a strong institutional mechanism to enforce conditionality now, labour market institutions will be better prepared to avoid long-term employment when demand returns.

One difficulty is that there are a large number of agencies involved with providing assistance to the unemployed: the DSFA, FAS and the local employment services (Box 3.2). This leads to the risk that the unemployed "fall between the cracks" of different supports, either voluntarily or because of the complexity of the system. Most OECD countries have moved to a system of a single agency dealing with the unemployed and handling both welfare payments and activation measures. This helps to ensure that the conditionality is effectively enforced and allows for greater efficiency. Ireland should adopt best practice in this area and have a single body dealing with the needs of the unemployed, both in terms of benefit administration and active labour market policies. This would require a redefinition of the role of the bodies involved at present including FAS and the Department for Social and Family Affaris. Given that Ireland is a small country, the currently large number of agencies involved is inappropriate.
Box 3.2. Agencies dealing with the labour market

Although Ireland has a small population, it is unusual in the
number of agencies that deal with the unemployed:

* The Department of Social and Family Affairs (DSFA) is responsible
for the administration of unemployment benefits, and the social
security system more widely.

* The Training and Employment Authority (FAS), which depends on the
Department for Employment, Trade and Enterprise (DETE), is the
public employment service. It provides placement functions and
training, both for the unemployed and the economy more generally.

* The 25 Local Employment Services (LES) operate under contract
from FAS and provide locally-based training and employment
matching.

* The Department of Education and Science runs regional technical
colleges and the Vocational Training Opportunities scheme for the
long-term unemployed.

In addition, Pobal, a non-profit company, runs the Local
Development and Social Inclusion Programme (LDSIP).


The interaction of unemployment support and the minimum wage may lead to a poor outcome

The interaction of different labour market institutions determines the overall effect on long-term unemployment. As discussed above, a combination of high replacement rates and weak conditionality is likely to sustain high levels of unemployment. Given that replacement rates will be high even for workers around the average wage if no changes in policy are made, the weaknesses identified in conditionality could have a serious effect on unemployment. For low-skilled workers, the minimum wage may become an additional constraint on labour demand if firms cannot offer jobs at more competitive wages and there may be further difficulties if interaction with social benefits is not taken into account. Furthermore, given that the Irish labour market is highly open to foreign workers and migration routes are now well established, a high minimum wage combined with insufficient incentives for Irish workers to accept some jobs or for employers to take on unemployed workers from Ireland could result in vacancies being filled by new migrants while unemployment remains high.

Active labour market policies

Unemployment can have a long-term impact on the prospects of those who lose their jobs if it leads to the loss of human capital or prevents workers from returning to the same quality of job. To avoid unduly large losses of human capital, the main policy objective should be rapidly to re-integrate into employment those who lose their jobs, while maintaining as far as possible the mutual-obligations ethos of the activation regime that is needed in the long run to avoid structural unemployment (OECD, 2009a). (15) An evaluation of 199 active labour market programmes in a wide range of countries since 1995 suggests that job-search assistance has relatively favourable short-run effects, while classroom and on-the-job training shows better medium-run outcomes (Card et al., 2009), and subsidised public sector employment programmes have the least favourable effects. Labour market policy spending in Ireland in recent years has been low by European standards, and considerably lower than in Nordic countries (Table 3.3). However, there has been relatively extensive apprenticeship support by international comparison, much of which was targeted at construction. Spending on passive measures has been low by international standards, but expenditure on direct job creation, notably through the Community Employment scheme, has been high. The design of this scheme is unlikely to have the most favourable effects but it is costly in terms of the support provided per worker and does not necessarily provide the most effective path back to paid employment in the market sector.

Spending on public employment services and administration is low by European standards. Furthermore, a majority of staff are working on unemployment benefit administration rather than the placement of unemployed workers (Grubb et al., 2009). The number of staff in public employment services has fallen relative to the labour force in recent years and left Ireland with fewer resources for the number of potential users than other European countries. Although the proportion of frontline staff appears to be high, the large number of agencies involved and the small size of local offices suggests that services might not be delivered in the most efficient way in terms of helping those without jobs to stay close to the labour market and get back to work. This leaves relatively few resources to deal with activation and to ensure that it works effectively. Key programmes are discussed in Box 3.3.

Some existing programmes in Ireland are not well adapted to the current circumstances and are not well-designed in terms of having the maximum impact at the lowest cost. Over one-third of FAS' budget of around 1 billion [euro], which is part funded by a 0.7% payroll tax on employers together with a larger contribution from the Exchequer, is spent on the Community Employment (CE) scheme. The CE scheme provides public support for part-time jobs in the public and voluntary sectors. Individuals are in principle allowed on the scheme for up to three years, (16) although this may be difficult to apply in practice given that both participants and employers can be reluctant to move on and it can be regarded as a cheap way of providing certain services locally. It is possible that this scheme even reduces employability in unsheltered jobs by keeping people in basic non-market activities. This scheme is therefore relatively close to a form of on-going social assistance rather than a pathway to market employment, placing it in one of the least effective categories of labour market intervention. Furthermore, the scheme is expensive with just 20 000 people on the scheme. No comprehensive evaluation has been carried out of the CE scheme in recent years. A full evaluation of its costs and benefits, taking into account the impact on employability is necessary. Other models should be considered such as the Australian "Work for Dole" scheme, which is part of a strong mutual obligations approach, or Social Enterprises in Finland, which have more limited public subsidisation of jobs and a larger role for commercial activities. In the meantime, given the shortage of resources to support wider activation measures, the CE scheme should be scaled back. It also appears difficult to justify the creation of 400 additional places in the Supplementary Budget. Other training programmes have, in the past, largely been oriented towards sectors, such as construction, for which demand is now limited and there is substantial number of apprentices mid-way through their training under these schemes. The quality of training under these courses has been good, but a more strategic approach may have avoided putting resources towards sectors where demand was unsustainable.

Scaling up programmes to deal with the large increase in the number of unemployed will be a major challenge, particularly within tight budgetary constraints. Automatically referring clients after three months of unemployment to the NEAP is likely to be difficult to implement effectively given current resources as the number of unemployed increases (Grubb et al., 2009). The strategy at present has been to redirect resources from elsewhere in the training budget and provide shorter courses to more people (Box 3.4). This is appropriate in that many of the unemployed were recently in employment and therefore need less intensive "back to work" training. It makes sense to expand programmes that can be scaled up quickly or in a cost-effective way. On the other hand, there is a risk that the quality of training may be less than would have been the case. There are also challenges in dealing with a new population of unemployed: migrants, those with low skills whose long-term prospects have deteriorated sharply as a result of the correction in demand, and professionals who are becoming unemployed. Effective spending on activation measures should be cost effective in the sense that reducing long-term unemployment will boost the economy and reduce social expenditures in the medium term. It is therefore important that sufficient resources are reallocated to such programmes, even if this requires the scaling back of other existing less effective schemes.
Box 3.3. Main employment programmes in Ireland

The main labour market programmes in terms of size are:

* The Community Employment (CE) scheme is a programme for the
long-term unemployed that provides pay and support for up to two
years of employment in the non-market sector. There were over 20
000 people on the CE scheme in 2007: more than 1% of the labour
force. Some of the specialised functions for those needing
intensive support and a period of sheltered employment are needed,
but the scheme as a whole is too broadly targeted both in terms of
cost and giving insufficient encouragement to join regular
employment for those for whom this is most appropriate. A programme
along these lines may have a role as a last resort under a
mutual-obligations approach, but does not play such a role at
present in Ireland.

* Back to Education Allowance (9 000 participants) allows those
aged over 21 years to return to education, while continuing to
receive benefit income equivalent to unemployment benefits and a
Cost of Education allowance. In 2009, the qualification period was
reduced to 3 months for second-level education and 9 months for
third-level courses. Although it is useful to take advantage of
periods of unemployment to improve skills, particularly those that
may improve employability afterwards, this scheme is not very
specifically targeted at those for whom it could have an additional
benefit in terms of raising their labour market prospects.

* Back to Work Allowance introduced in 1993 allowed the long-term
unemployed to keep 75% of their unemployment benefits in the first
year after returning to work, falling to 25% in the third year,
together with some secondary benefits. There were 4 300
participants in the scheme in 2007, far below the original rate of
participation and partly reflecting tighter eligibility conditions.
It was closed to new entrants in 2009. The Back to Work Enterprise
Allowance is a similar scheme for entry into self-employment and
has been on a similar scale. In 2009, the scheme was expanded so
that only one year of unemployment was necessary to qualify but the
duration has been cut from 4 to 2 years. A Short-Term Enterprise
Allowance has been introduced, which provides one year of support
to those eligible for JB. These schemes carry the risk of heavy
deadweight losses as those most likely to exit unemployment are
most likely to use the support. Although the new measures may be
good for people who are "work ready" but unable to find dependent
employment, there is also a risk of cycling. These schemes are
quite complex and do not directly engage with some of the important
disincentives that currently exist within the system.

In addition, FAS training centres provides general
(Bridging/Foundation courses) and specific skills training. There
were around 4 800 participants in such programmes in 2007.

Box 3.4. Labour market measures taken to deal with the rise in
unemployment

The increase in unemployment has been spectacular: claimant count
unemployment has risen by around 255 000 to reach around 428 800 by
August 2009. New measures costing up to 370 million [euro], taken
from existing budgets, to support those who lose their job have
been introduced, in addition to the existing supports.

The main measures are:

* A doubling of training and work experience activation places to
128 000 per year to be provided through FAS.

* A doubling of places to in the education sector to 146 000
places, including 91 000 training places, mostly on 10-week
courses, under the Training Initiatives Strategy; 2 000 additional
places in full-time third-level education and further 1 500 in
part-time university courses; 2 000 places under the Work
Experience Scheme for recent graduates; 1 500 places in
Post-Leaving Certificate Courses; and over 41 000 places under a
variety of other initiatives.

* A Temporary Employment Subsidy Scheme (TESS) with an initial
budget of 250 million [euro] to provide a subsidy of up to 200
[euro] per week per worker to qualifying firms in the manufacturing
or traded services sector to retain a person in employment for a
period of up to 15 months.

The Back to Work Allowance scheme has been modified so that it will
only provide support for those going into self-employment rather
than employment. In addition, the duration and extent of support
has been limited while the qualifying period has been halved to one
year. The Back to Education Allowance has also been made easier to
access and greater emphasis given to shorter education and training
courses.

The approach through training and education has a number of
strengths. Firstly, the emphasis on short courses increases the
number of people who will receive some training over a given period
within a given level of expenditure. Secondly, the measures are
partly targeted at groups that may need greater support to
integrate the labour market. This is particularly true of younger
workers who may not yet have developed strong attachment to the
labour force. Thirdly, the emphasis on training means that these
programmes should also contribute to raising human capital.

The impact of the TESS will depend in part on how it is
implemented. Although it is in principle targeted at firms that
have the potential to grow in the future and have already
restructured, the cost per job saved is likely to be relatively
high unless a way is found to ensure that only jobs that would
otherwise temporarily have been lost are retained. A subsidy aimed
at hiring those who have been unemployed for some time might have
contributed more effectively to improving labour market outcomes.

The problem, however, is that the overall scale of the programmes
is limited compared with the number of unemployed. Although many
people who lose their jobs will be able to find work without
assistance, it is likely that many of the newly unemployed will not
find jobs for some time. Although they have access to existing
programmes as well as new schemes, this still represents a large
population that cannot be reached within the constraints of the
current level of funding. Despite overall constraints on public
spending, additional resources in this area would reduce the risk
that high unemployment will persist as the economy recovers. Given
the fiscal and social costs of unemployment, there would be a high
return to redeploying additional resources to effective programmes
for support those who lose their jobs as an integral part of a
strengthened activation strategy.


Subsidies may help to support labour demand and manage the high level of unemployment (OECD, 2009a). Given the tight fiscal constraints, however, very costly policies should be avoided. This includes measures that cover the entire workforce, like temporarily reducing employers' social security contributions, which have high deadweight costs for those already employed. International experience suggests that short-time working subsidies are difficult to implement effectively and these are most appropriate for well-defined temporary reductions in labour demand. The Temporary Employment Subsidy Scheme (TESS) is targeted, temporary and in principle only covers with good growth prospects and that have restricted. However, this must be carefully implemented to ensure that the risk of high deadweight loses are avoided. Hiring subsidies can be relatively effective compared with other measures. These should be targeted at groups from whom they are most effective and carry strict conditions for employers. Subsidies could be offered for those unemployed for some time (at least one year) and should be related to net changes in employment, rather than gross hiring, to remove incentives to replace existing employees with subsidised workers. Paying such subsidies as rebates of employer social security contributions paid after one year further strengthens the incentive not to churn employees. This would help to ensure that the flow of new jobs is directed towards preventing long-term unemployment. Public job creation schemes may provide a backstop in a very long and deep recession, both in boosting labour demand and activating the unemployed. This approach, however, is likely to be costly. These schemes must be temporary, to cover the worst of the weakness in demand, and should not become a disguised form of subsidised permanent unemployment like CE.

Migration has begun to reverse

The number of foreign nationals working in Ireland has fallen as demand for labour has contracted, beginning to reverse the strong net inwards migration experienced from the mid-1990s onwards. By the first quarter of 2009, the number of foreign workers has fallen by 16%, 56 000 people since the first quarter of 2008. The full extent of changes in the stock of foreign employees is hard to evaluate in real-time as the QNHS is known to provide an incomplete picture of the immigrant population (Barrett and Kelly, 2008): it reported that 8.4% of the population aged over 5 were foreign nationals in 2006 in the same quarter that the census indicated that the proportion was 13.3%. Other indicators also point towards a reversal of migration trends. The number of work permits issued has fallen, particularly for renewals. The number of new Personal Public Service Numbers (PPSNs), a national insurance number required to work, issued to migrants has fallen dramatically. There have been widespread falls among different nationalities of migrants, but the main driver in the overall slowing in the issuance of new PPSNs is the halving of new migrations from the EU new member states. The gross flows of migrants have always been very large compared with the stock of migrants, consistent with migrants staying in Ireland on average for a year or two only, so that the reduced inflow would be insufficient to maintain the existing stock of foreign workers.

Despite the outward migration, unemployment benefit receipt among foreign nationals has been significant. While it was initially above their share of the labour force at around 20% of those on the Live Register, the proportion has fallen over recent months and the increase in the number of foreign nationals claiming benefits has been small compared with the increase for Irish nationals. However, it appears that many migrants are remaining in Ireland while unemployed. While the costs of living in Ireland may be high compared with other countries, benefits are also quite generous by international comparison and employment prospects are also likely to be weak in some of the new EU member states and other countries to which EU migrants might go for work. This effect is tempered by the characteristics of the migrants themselves: many left families behind to come to work in Ireland in jobs below their skill level, so staying is unattractive for many non-monetary reasons. It is likely that some EU migrants are claiming the Irish benefits to which they entitled but looking for work at home or elsewhere, which is allowed under EU law under certain conditions and for a limited time. Enforcement measures in 2008 ended benefits for some people claiming benefits but not living in Ireland or fulfilling their requirements.

Migration has long been an important adjustment mechanism in the Irish labour market, prior to the mid-1990s primarily through migration of Irish workers to and from the United Kingdom and also to the United States (Figure 3.9). In the previous Survey, (17) it was shown that the semi-elasticity of the net migration rate with respect to a one per cent increase in GDP per capita growth was much higher in Ireland than in any other of 18 OECD countries, at around 0.4, compared with around 0.2 in the group of next most sensitive countries such as Australia, New Zealand Switzerland. In addition, the net inward migration in recent years into Ireland was stronger than could be explained by this long-run relationship.

[FIGURE 3.9 OMITTED]

The migration into Ireland since the mid-1990s is likely to have a substantial permanent impact on the Irish labour market, despite recent cyclical outward migration. Of the three groups of migrants identified in the previous Survey (OECD, 2008a), some or even most of the migrants in each category are likely to stay: Irish return migrants and British immigrants are well integrated and likely to stay, even if some Irish workers continue to look for employment opportunities abroad; the large contingent of migrants from the new EU member states are perhaps the most sensitive to the state of the economy, which has been reflected in the composition of outward migration to date, but some have established roots in Ireland and will stay; and migrants from the "rest of the world", a diverse group coming from outside Europe or the United States, will have varied experiences as some have come to Ireland for specific employment opportunities but others who have come as refugees or asylum seekers are likely to have fewer good options to return home.

With a substantial foreign population likely to stay, the primary policy challenge remains the integration of immigrants. Non-EU migrants had unemployment rates around 3 percentage points higher than average, even when labour demand was strong. The previous Survey identified a particularly large gap between the skills of migrants and the jobs they were employed to do. Improving language training, both for adult migrants and their children, would help to address this, as well as accelerating work on the recognition of foreign qualifications and introducing an on-the-job skill assessment programme. In some ways, the recent ebb in migration has made the issues facing integration of immigrants simpler by removing some of the uncertainty about the extent to which migrants were likely to settle and it makes it easier to focus attention on the population that will remain rather than the transitory cohort of migrants from the new member states of the EU.

The Irish approach to providing services for migrants is based on directing immigrants to mainstream services such as health, labour market, education and housing rather than through separate settlement and adaptation programmes. This strategy reduces the risk of creating poorly integrated "enclaves" of migrants, although it is equally important that access to services is adequate to ensure the immigrants have the skills to be full members of society. The 2008 Statement on Integration provides a strategy for dealing with integration issues (Office of the Minister for Integration, 2008).

Immigration policy for the long term

Ireland is only able to influence immigration at the margins through policy. Appropriate selection policy is important for ensuring that an economy with a small pool of domestic workers is able to provide the skills necessary for the development of the multinational sector and high value-added clusters such as ICT industries in Cork and the IFSC in Dublin. Of the 1 500 staff at Google's European headquarters in Dublin, 1 200 are non-Irish and there are 58 different nationalities. (18) Migrants with complementary skills to native Irish labours can help to increase the productive capacity of the economy and improve the prospects of existing workers. While unskilled labour that has been important to dampen costs in sectors such as construction is likely to be available from new EU member states where wages are much lower than Ireland, it may be important to attract highly skilled workers with specific skills and abilities from outside Europe to help sustain long-term productivity.

A number of policy initiatives have been taken in the recent past, mostly concerning immigration from outside the European Economic Area (EEA). (19) Significant changes in legislation in 2007 concerned the two main migration channels:

* The "green card" scheme was introduced. This gives employees the right to work for two years (with the possibility of indefinite extension), allows immediate family reunification and gives fast access to long-term residence status. Applicants must have a valid job offer, usually with a salary of at least 60 000 [euro] (lowered to 30 000 [euro] for occupations in a restricted number of sectors facing skills shortages). (20)

* The work permit scheme was modified. Building on reforms in 2003 to focus more on highly skilled workers, it now covers occupations in the 30 000 [euro] to 60 000 [euro] range with few exceptions. There is also a list of ineligible occupations. A tougher labour market test was introduced. The permit is now issued directly to the worker, strengthening their status. Family unification is possible after one year.

* Changes were also made to some of the other channels. The intra-company transfer scheme, allowing for temporary management transfers within multinationals, was reintroduced in 2007 after having been suspended in 2002 following abuse. The Third-Level Graduate Scheme was introduced, allowing non-EEA students who have studied in Ireland to work for six months after graduation and apply for a "green card" or work permit.

The impact of these measures is difficult to evaluate, even two years after their implementation, given the overall fall in labour demand. The total number of permits issued fell by almost half in 2008 compared with 2007. Take up of the "green card" scheme may also initially have been held back by lack of awareness. (21) The main industries benefitting from the two permit schemes are the services sector, catering and the health. Just 1 264 permits were issued for industry in 2008.

The approach taken to migration selection is employer-driven and gives them a large role in choosing workers from abroad. This contrasts with more supply-driven systems in countries that use a points system, where qualified potential migrants are selected on the basis of criteria (such as education, language ability, and work experience) and may then enter the country to search for employment. Given the small number of non-EEA nationals that are likely to be needed, the simplicity of the "green card"/work permit system probably makes it the most suitable approach. Many European countries have moved to using such an employer-driven system and supply-driven systems have increasingly shown their limitations (Chaloff and Lemaitre, 2009). The potential drawbacks of Ireland's employer-driven policy suggested in the previous Survey do not appear to have materialised so far: the loss of control of overall numbers in the absence of numerical limits, bias in favour of older workers because of the salary threshold, and favouring certain occupations that happen to be in the middle-salary ranges. There is no evidence that these schemes particularly hindered necessary wage adjustments or have had long-term consequences, as employers focus on their own labour needs rather than the overall merits of bringing someone into the country. The policy framework should, however, continue to be monitored to ensure that they are achieving their objectives and the frequent reviews of the occupational list for work permits are a good practice.

The overall quality of life is important to attracting highly skilled migrants, for whom there may be strong competition from other countries looking for the same resources. This underscores the importance of policies not only to ensure high disposable incomes and a reasonable cost of living, but also much wider quality of life issues such as the availability of childcare, good quality health and education and high standards of infrastructure. Migration policy can help by providing the legal stability to encourage migrants to establish themselves in Ireland, including bringing the families with them, and by minimising the administrative burden of their situation. The proposed 2008 Immigration, Residence and Protection Bill would be useful in this regard. The new status of long-term resident would give those with at least five years legal residence, less for "green card" holders, access to the labour market and state-funded services on the same basis as Irish citizens, (22) and allow multiple re-entry visas for resident foreigners, who currently need a new visa each time they leave the country, thereby substantially lowering the administrative burden facing highly mobile workers.

Policies to raise employment in the long term

Even during the years of strong economic performance, some groups continued to have low employment rates (Table 3.4). These include: women, lone parents, people with long-term health problems or a disability, those aged under 25 years of age and those over 55. It is common experience among OECD countries for these groups to have more marginal attachment to the labour market. Furthermore, these groups are most vulnerable to becoming detached from the labour force through their exposure to the risk of unemployment and the likelihood that this becomes permanent. Indeed, there is a risk that some social welfare benefits, particularly those related to old age and disability, become alternatives to pathways away from the labour market and into inactivity. This would become more likely if unemployment benefits are reduced or conditionality is more strictly enforced. Reforms to maintain or raise employment among these groups are important to expanding the labour force in the long run.

The Irish welfare system is based on a "contingency" approach so there is a wide range of different social benefits available for people in different situations. These generally offer relatively similar benefits, although the exact amounts and conditions may differ. This complexity increases the likelihood that there are poverty traps and makes the administration of the benefit system more complex and costly. As discussed below, several benefits are not designed to encourage people to work to fulfil the maximum of their potential. Consideration should be given to introducing or moving towards a single welfare payment for working-age adults to replace the existing range of payments, a direction in which some other countries are moving. Some of the measures discussed below go in this sense by suggesting more similar treatment across different groups, particularly with respect to the requirement to look for work or participate in training. Such a single payment should be means-tested and based on an assessment of the work capacity and need for support to participate in the labour market.

Raising female participation

Female participation in the labour force has increased in past years, rising by around one percentage point per year on average to reach 60% in 2007. Although the increase has been very rapid by international standards, female participation in Ireland is only marginally above the OECD average and well below those in other English-speaking and Nordic countries. Furthermore, part-time employment is more common in Ireland so that the actual supply of labour by women is lower by international comparison than the participation rate would suggest (Figure 3.10). The rate of participation for women with children is particularly low. Women have so far been substantially less impacted during this recession than men in terms of the fall in employment, the increase in unemployment and lower participation. This difference, however, may narrow as job losses spread to sectors where women are more heavily represented in the workforce. It will be important to avoid the cyclical downturn in female employment and participation from becoming permanent. In particular, women are over-represented in low wage activities, such as services, and so may be adversely affected by the high level of the minimum wage and the current level of social benefits.

[FIGURE 3.10 OMITTED]

The incentives for second earners to work full-time have a strong effect on female participation. While the sensitivity of the primary earner to changes in income taxes is generally quite small, the response of second earners is typically much stronger (see Johansson et al., 2008, for a review of recent evidence). With marginal direct taxes for people earning around average wages having increased in broad terms by 4 percentage points due to the Income and Health Levies, it is likely that female participation will be affected. Ireland has a hybrid income tax system, where married couples can choose the most favourable option from both being assessed as single person, separate assessment (where some tax credits may be divided equally) and full joint taxation, which is usually the most favourable in terms of the overall tax burden. Comparing discrete options in terms of working hours, there are disincentives within the tax system that could be removed, increasing female participation and raising more revenue for a higher level of total hours worked (Callan et al., 2007). The benefit system can have similar effects: for example, means-testing on household resources may create weak incentives for the spouse of an unemployed person to seek part-time work.

As argued in the 2006 Survey (OECD, 2006), (23) high childcare costs and limited supply have been a major obstacle to female participation. The National Childcare Strategy is on course to provide an additional 50 000 childcare places, broadly equivalent to enough places to provide childcare for every child born in a single year, and has led to a substantial increase in the childcare capacity, both in terms of facilities and the availability of qualified staff. The supply of out-of-school-hours provision has also been limited and, although 5 000 additional places have been provided, this is a tiny fraction of the number of children aged 6-12. Efforts should continue to develop the cost-effective solution of making school buildings available for after-hours community projects.

Government support for childcare, both direct and through the tax system, has not been well targeted in recent years as it has been available on the same basis to non-working as well as working families. This is changing as the universal Early Childcare Supplement for families with children under the age of six, introduced in 2006, was cut from 1 104 [euro] to 498 [euro] in May and eligibility cut to five years of age. It will be abolished in 2010 and replaced by a new free pre-school year for those aged between three and five years in Early Childhood Care and Education (ECCE). This is expected to benefit some 70 000 children, the majority of its target population. This will provide some help with childcare while parents are at work, although the scheme is not specifically targeted at this group so there is some dead-weight loss. It should, however, also contribute to raising human capital and helping children from disadvantaged backgrounds.

Helping lone parents to work

Lone parents are an important part of the population in Ireland with almost one in four children being raised in a family headed by one adult (CSO, 2007). Lone parents also represent a sizeable group of the potential labour force with almost 4% of the working-age population in this family situation. Employment rates for lone parents are low at around 55%. The gap between the employment rate of lone parents compared with all those with children living at home is particularly large by international standards (Figure 3.11). Closing this gap could increase the workforce by the order of 1%. The low employment rates of lone parents are not only a labour market issue but also raise wider social questions. Lone-parent households are poor on average: 38% have equivalised household income of less than 60% of the median, the standard measure in Ireland of the at-risk poverty rate, and one fifth are in consistent poverty (CSO, 2008). (24) This compares with a 14% at-risk poverty rate for two-adult households with children and the small number of such families in consistent poverty.

Lone-parent families are heavily dependent on social welfare payments. In addition to the universal Child Benefit, around three quarters of lone parents received the One Parent Family Payment (OPFP). This is a means-tested benefit worth 250 [euro] per week for a lone-parent household with two children. A 12% increase in the payment in 2007 contributed to a substantial fall in the numbers of families officially defined as being in poverty by either of the measures discussed above. However, this is in part because the value of social benefits for a lone parent family is relatively close to these measures of the poverty line and therefore the numbers of people defined on this basis as being in "poverty" can be very sensitive to changes in benefits and overstate the degree of real improvement in living standards that has been achieved. The continuing high poverty rates among lone-parent households underlines the limits of the approach of raising benefits used in recent years to tackle poverty in this group, benefits which already cost 0.6% of GNI.

[FIGURE 3.11 OMITTED]

Raising the employment rate of lone parents would therefore help both to boost the labour force and tackle poverty. Although incentives to work are good for some groups such as those able to earn around the average wage, the benefit system and limited childcare provision create some barriers to returning to work for those with lower potential wages, which is often the case with lone parents who are less well educated on average than the population as a whole. Survey evidence suggests that there is a strong desire among lone parents themselves to undertake training and enter employment (Murphy et al., 2008). The employment rate of those on Rent Supplement is just 15%, much lower than for those receiving other forms of housing support. Ireland is unusual among OECD countries in not requiring lone parents with school-age children actively to look for work as a condition for receiving benefits; only a handful of other countries do not require mothers of teenage children to work. Germany, Norway and Sweden impose the requirement once the youngest child is 3 years old. For this policy to work effectively, it is important that those subject to these requirements have appropriate support and are given high priority in terms of access to childcare. Well-designed activation and training measures are also important. Substantial reforms in this area are planned but progress has been slow (DSFA, 2006).

Sickness and disability

The number of recipients of long-term sickness and disability benefits has more than doubled since 1990, despite general improvements in health and living conditions as well as strong demand for labour (Figure 3.12). Although this partly reflects a widening of eligibility in 1996, the number of claimants increased by almost one third in the five years to 2007. This increase may partly be explained by the increase in the level of sickness benefits and tighter conditions on claiming unemployment benefits. Disability benefit recipients account for almost 9% of the labour force, a share that appears to be somewhat below that in the OECD countries with the most severe problems but nevertheless above the OECD average. The employment rate of people with disability is about half the overall rate with around one third in work, even with the tight labour market in 2007. This is a significant social problem as it partly reflects barriers and disincentives faced by those with disabilities in accessing work. Furthermore, this leads to a high dependence on minimum social benefits and an incidence of poverty that is several times higher than in the population as a whole.

[FIGURE 3.12 OMITTED]

Inflows to disability schemes have remained high and the number of disability allowance recipients is projected to reach 100 000 this year, an increase of almost 9% on the previous year. (25) Eligibility for the allowance is based on a medical certificate from their general practitioners, which is revised by an assessor at the DFSA and may be subject to a medical examination. International experience shows that general practitioners are not well suited to acting as gatekeepers to this type of benefit: all disability benefit claims should be based on a rigorous medical examination by the DFSA's own medical staff to ensure that the rules are being consistently and correctly applied. Stricter enforcement measures on those claiming for lower back pain led to a large number of claims being terminated. By international standards, the approach to existing disability recipients is generally rather passive and reactive. For example, the Supported Employment scheme run by FAS helps the disabled unemployed towards private sector employment but it is small in scale and is designed for those already looking to go into employment. A recent OECD report identified four major areas of weakness where improvements could be made (OECD, 2008b):

* The benefit system is complex, leading to inefficiencies, and there is too little assessment overall of claimants' work capacity. This assessment should be strengthened along the lines of the Australian Job Capacity Assessment. In line with normal practice in the OECD, sickness benefits should not be paid indefinitely: after one year, recipients should be regarded as disabled and subject to a comprehensive work-capacity assessment. Consideration should be given to extending conditionality to those with disabilities, based on their capacity to work. Experience suggests that a mandatory scheme, requiring attendance at an interview in the first stage, is likely to be much more effective in encouraging labour market participation than voluntary schemes. Requirements to seek work or undertake training could be applied to some groups.

* Engagement with the disabled is fragmented, with the DFSA dealing with benefit administration and FAS/DETE having the primary response for training and employment. This may explain why few disabled people have received any training. Systematic engagement should be implemented and adequately resourced with closer interaction of the different agencies around each person.

* Employment support for the disabled is often specialised, rather than in "mainstream" programmes, and is not focussed on transfer into open employment. This process should be better managed and the performance of training programmes in terms of employment outcomes monitored and evaluated rigorously.

* There are disincentives to return to work. Factors that affect the whole population, such as the high level of benefits for those with low market wages and the loss of secondary benefits, may impact the disabled more strongly given the intrinsic difficulties they may face in the labour market. Although the Medical Card can be retained for three years after a recipient returns to work, this may be a significant behavioural barrier for those with poor health. Consideration should be given to how support is most effectively channelled to the disabled returning to work, either through existing supports or by extending the Family Income Supplement.

The National Disability Strategy, launched in 2004, is working towards a more active case management approach and the DETE is seeking to improve services and engage more with new entrants. However, progress has been very slow and substantial further efforts are required to ensure that those with disability are able to benefit from the upswing in the labour market when this occurs. Efforts should concentrate both on controlling inflows and managing the stock of disability recipients more effectively. This would help those with disabilities to participate in the labour market, which is important both for their welfare and for supporting wider social objectives.

Youth employment

Young people have been more severely hit by the contraction in labour demand than the workforce as a whole. The fail in employment has been much sharper and the unemployment rate is close to one quarter of the labour force for young men. Such a pattern is common in economic slowdowns because worker-job matches are less established for younger workers as they typically have less job-specific human capital. The poor experience of young male workers in this episode is likely to reflect their strong presence in the construction industry. It will be a major challenge to reintegrate these workers into other sectors of the economy: this will require a substantial and targeted investment in training and rapid action to ensure that their attachment to the labour market is not broken. More generally, younger workers tend to have low earning power and so their employment as the recovery begins is vulnerable to being held back by the high level of the minimum wage and unemployment benefits.

Youth employment poses problems in many OECD countries. In Ireland, employment rates for those aged under 25 are relatively high by international comparison (OECD, 2008c). (26) This is in part because young people leave education at an earlier age and because demand for labour was strong. However, as elsewhere, there are young people that are not in education, employment or training (NEET). The NEET share of the cohort population in Ireland is somewhat below European and OECD averages. However, the underlying problems is of a similar nature to those in other countries: 12% of those aged 20 to 24 with below upper secondary education were neither in employment or education in 2006, compared with just 4% among the those with upper secondary-level qualifications (OECD, 2008d). Although Ireland performs above the average in achieving high rates of completions up to at least upper-secondary level, it remains below the best-performing countries. More effective activation policies and appropriate training would strengthen this group's attachment to the labour market and raise their skills and productivity. Raising the school leaving age from 16 to 18 could help to reduce youth employment created by the crisis. This should include vocational education and apprenticeship options and there should be a requirement to work towards a recognised qualification. (27)

Keeping older workers in the labour force

The employment rate falls quite sharply after age 55 and is only around 45% for those aged 60 to 65 years. This partly reflects low levels of female participation among these cohorts due to past social and economic conditions, as well as early retirement that is voluntary. However, the labour market attachment of older workers is likely to be weaker than for prime-aged workers and it may be difficult for them to find new suitable employment if they lose their job. This can make older workers vulnerable to the economic slowdown and poorly-designed social policy. Although the unemployment rate of older workers has not deteriorated especially rapidly during the downturn, the employment rate has fallen by over two percentage points during the current labour market contraction, more than for younger workers. There is a risk that, when older workers lose their jobs, this leads to a permanent exit from the labour market. In earlier years, the Pre-Retirement Allowance provided a channel from unemployment to retirement without returning to work for those between 55 and 66 years of age. This has now been removed and older workers are in principle subject to the same job-search requirements as anyone else, although heavy reliance within the Irish system on people being motivated to activate themselves may be particularly ineffective for those who see themselves as close to retirement. Disability benefits, however, can be a pathway out of the labour force for older workers. The number of people claiming the Invalidity Pension has increased substantially in recent years: recipients of this benefit now account for around 12% of those aged 60 to 65. Alongside disability benefits, access to this benefit should be tightened in line with best practice elsewhere and greater emphasis should be put on activating those currently receiving this payment. Ireland should avoid making the mistake of many other OECD countries in the early 1990s in trying to remove older workers from the labour force as this reduces overall labour supply while doing little to encourage younger workers.
Box 3.5. Summary of recommendations on labour markets

Labour markets appear to be adjusting rapidly to lower demand but
there are risks that unemployment will persist even as the economy
recovers due to weaknesses in structural policy settings.
Longstanding barriers to full labour force participation should be
removed.

Reducing long-term unemployment and inactivity

* Unemployment benefits should be reduced in line with falling
earnings. Further reductions may be necessary once the recovery
begins if the level of benefits creates disincentives to return to
work.

* The design of unemployment-related social benefits should be
improved to remove strong disincentives to enter employment,
particularly for benefits with high taper rates such as Rent
Supplement.

* Tighten activation requirements for the unemployed. All
unemployment-benefit claimants should be required to subject to
early and regular interaction with employment services. Failure to
comply with these requirements should be actively enforced by
reducing benefit payments. FAS counsellors should follow up on job
referrals and participation in labour market programmes. Claimants
should ultimately be required to enter an active labour market
programme if other options are not taken up.

* Unify the administration of unemployment-related policies in a
single government body, including the processing of
unemployment-related benefit claims, placement activities, and the
operation of labour market policies that are currently administered
the Department for Social and Family Affairs and FAS and others.

* Active labour market policies should be further adapted to the
current unemployment problem. Cost-effective programmes targeted at
the needs of those without jobs should be expanded and additional
administrative resources allocated to activation policies. Given
overall budgetary constraints, this will require a re-allocation of
resources and limiting existing programmes that are not designed in
a cost-effective way.

* The level of the minimum wage should be re-assessed in line with
falling wages and reviewed on an annual basis. The system of
sectoral minimum wages should be re-considered.

Raising overall participation and employment

* Consider implementing a single welfare payment for other
working-age adults to replace a range of existing schemes, with all
subject to activation measures as appropriate.

* Increase the supply of childcare further. Continue to encourage
more out-of-school-hours care where school facilities are suitable.
Consider measures to link childcare support to employment status.
Phase out the Home Carer's Tax Credit. Prioritise access to
community childcare to working parents, especially lone parents.

* Ensure that higher tax rates and burdens do not unnecessarily
impact on the incentives of second-earners to work. Consider moving
to full individual taxation.

* Require lone parents to seek work once their children reach
school age.

* Assessment for eligibility for disability benefits should be
independent. The work capacity of disability benefit recipients
should be systematically evaluated. Illness benefit should be
limited to one year, after which recipients should be assessed for
their work capacity under disability programmes. Incentives and
support should be given to encourage those with disabilities to
participate in the labour force.

* Engagement with the disabled should be more systematic.
Employment services for those with disabilities should be improved
and focussed on helping people to access mainstream employment.
Consideration should be given to extending conditionality to some
groups with disabilities.

* Raise the school-leaving age to 18 and provide appropriate
training options.

* To increase the incentive to stay in work, offer an
actuarially-equivalent increase in the state pension for deferred
retirement. Consider making the value of the contributory pension
more sensitive to the number of years of contribution to increase
the incentives to work longer. Further limit the means-testing of
labour income in the non-contributory pension. Eliminate incentives
for older workers to exit the labour market through disability
schemes. Increase the flexibility to work past age 65.

* Continue to monitor the impact of policies towards migration.
Create flexible visas, such as multi-use, multi-entry visas. Ensure
the appropriate level of support for language training for adult
migrants and provision of language classes for all ages of
children. Continue to monitor the integration and labour market
situation of migrants.


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Notes

(1.) The main source of labour market-related data in Ireland is the Central Statistics Office (CSO) Quarterly National Household Survey (QNHS), which superseded the annual Labour Force Survey in 1997. The aggregate data given in this chapter, such as the overall employment rate, are taken from the OECD Economic Outlook (OECD, 2009), while disaggregated series such as the employment rate for females is taken directly from the QNHS as published by the CSO unless otherwise stated. Although both based on the same underlying QNHS data, there may be small inconsistencies between the two sources due to different seasonal and other adjustments. The labour force includes the military. The working age population is defined as individuals 16 through to 64 years of age. Employment for the purposes of deriving productivity is based on the national accounts concept rather than the labour force survey.

(2.) There are two main sources of data relating to unemployment in Ireland. The Quarterly National Household Survey (QNHS) is based on the International Labour Organisation (ILO) definition of "unemployment" as being without any work and available and taking specific steps to find employment. The Live Register is based on administrative data and covers recipients of Jobseekers Benefit and Jobseekers Allowance (with a few exceptions) and those signing on for PRSI credits. The Live Register total is considerably higher than ILO unemployment as the definition is broader, partly because it includes those working part-time but legitimately signing on. The Standardised Unemployment Rate is a monthly series based on the Live Register but benchmarked each quarter to the QNHS.

(3.) This tends to raise labour productivity per hour worked by shifting the composition of output towards more capital-intensive activities.

(4.) See Table 1.A2.1 (OECD, 2009a). This analysis is based on a decomposition of observed variation into cyclical and trend components using a band-pass filter.

(5.) The cyclical variation is captured using a band-pass filter, see Annex 1.A3 (OECD, 2009a). The main assumptions are that unemployment changes only as a result of contemporaneous changes in flow rate and that all transitions are between work and unemployment.

(6.) The Central Statistical Office has introduced a new comprehensive earnings survey, the Earnings, Hours and Employment Costs Survey. This currently only covers industry and financial intermediation.

(7.) See also Chapter 1.

(8.) See Chapter 3 (Wage-setting Institutions and Outcomes) of OECD (2004).

(9.) The unemployed are defined in terms of eligibility for benefits as those who are less than 66 years old and are unemployed for at least 3 days in each period of 6 consecutive days, capable of work, available for full-time work and genuinely seeking employment.

(10.) These payments were known respectively as Unemployment Benefit and Unemployment Assistance until-2006.

(11.) A JB claimant must have 52 weeks of paid PSRI contributions and have made adequate PSRI contributions in the two previous complete tax years.

(12.) 12 months for claimants having made at least 260 paid weekly contributions and 9 months for those having made fewer.

(13.) See the OECD benefits and wages models (OECD, 2007).

(14.) Rent Allowance allows an individual to work up to 30 hours without losing access to the benefit.

(15.) See Chapter 1 "The Jobs Crisis: What are the implications for Employment and Social Policy?" of OECD (2009).

(16.) Up to six years if aged over 55.

(17.) See Annex 6.A1 of OECD (2008a).

(18.) "What we do is fail--and fail fast", Business and Finance, 20 November 2008.

(19.) Excluding the citizens of Bulgaria and Romania, who will only be able to work in Ireland without a permit from 2012. Under EU rules, nationals from these two countries should have priority over non-EEA citizens.

(20.) Civil and mining engineers and all construction professionals were removed from the list of occupations subject to the lower limit in November 2008.

(21.) See "Slow take-up on green cards by immigrants", The Irish Times, 4 January 2008.

(22.) Periods of short-term study or asylum application do not count towards the five-year qualification period.

(23.) See Chapter 6 "Removing Obstacles to Employment for Women" of OECD (2006).

(24.) Those who in addition to low incomes are deprived of two or more goods or services considered essential for a basic standard of living.

(25.) The Irish Times, "Increase in numbers claiming disability allowance", Monday, 18 May 2009.

(26.) See Chapter 1 "Off to a Good Start? Youth Labour Market Transitions in OECD Countries", OECD (2008c).

(27.) All children must complete three years of basic secondary education, up to the Junior Leaving Certificate, regardless of age.
Table 3.1. Changes in employment by sector

                                             2008    Change    Change
                                            Level    2003-08   2007-08
                                            (000s)   (000s)    (000s)

Agriculture, forestry and fishing and         405      -12        -6
  other production industries
Construction                                  255       88       -27
Hotels, restaurants, wholesale and retail     435       63         0
  trade
Transport, storage and communication          122       10        -0
Financial, business and other services        417       81         9
Public administration, defence, education     470       80        12
  and health
Total employment                            2 104      310       -13

Source: Central Statistics Office, Quarterly National Household
Survey.

Table 3.2. Unemployment benefit recipients
and survey-based unemployment

                                                        Ratio of
                  Claimant rate     Unemployment      claimant rate
                   % of labour        rate % of         to survey
                      force         labour force      unemployment

Australia              4.9               4.9              1.00
New Zealand            1.8               3.8              0.47
Spain                  6.2               8.6              0.72
Sweden                 7.1               7.1              0.99
United Kingdom         3.3               5.4              0.60
Ireland                7.1               4.5              1.59

Source: OECD Labour Force Statistics, OECD Social, Employment
and Migration Working Paper No. 75 and EUROSTAT.

Table 3.3. Spending on active labour market programmes
% of GDP, 2006

                                                  Other
                            Ireland    Nordic      DECD       DECD
                              (1)     countries   Europe   non-Europe

Active measures              0.69       1.17       0.77       0.27

Of which:

Public employment service    0.12       0.22       0.22       0.13
  and administration
Direct jab creation          0.24       0.04       0.10       0.02
Dther measures               0.33       0.91       0.44       0.12
Passive measures             1.00       1.45       1.19       0.39
total                        1.69       2.62       1.95       0.66
Memo: Unemployment rate      4.36       5.93       7.53       4.52

(1.) Data for Ireland scaled by GNP.

Source: OECD (2008) and Grubb et al. (2009).

Table 3.4. Employment as a share of population by group

              Working-age                 20-24 years     55-64 years
              population      Females       of age          of age

Ireland          69.0          60.3          69.8            54.1
EU15             67.0          59.6          58.0            46.4
UK               72.3          66.3          67.4            57.4
Australia        72.9          66.1          76.8            56.7
Sweden           75.7          73.2          63.1            70.1

Source: DECD, Labour Force Statistics.
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