Labour market policy needs to balance support and incentive

ECONOMICS:Much will have to be done before the State's labour market policies meet best international practice, writes DAN O'BRIEN

LABOUR MARKET policy in Ireland remains ill-thought out. Despite the golden opportunity to modernise policy during a decade of full employment, when opposition and disruption would have been limited or non-existent, nothing was done.

In some ways the State’s employment policy even regressed during the period. Fás, the State training agency, became a slush fund in some respects and no thought was given to how very large increases in a range of welfare benefits would impact on incentives to work. Even now, four years into a chronic jobs crisis, too little has been done to bring the policy framework into line with best practice.

The announcement next week of a new National Employment and Entitlements Service (a working title) may be a significant step in changing that. What should it look like and, more widely, how can the State and its agencies best help the jobless?

Switzerland provides an example of best practice common elsewhere, including the Nordic countries. How the Swiss get people back to work is worth setting out in some detail because it is a template to be emulated.

Swiss employment policy is based on a number of core principles. First, reduce the trauma of job-loss by minimising the income reduction. To achieve this, welfare benefits amount to 80 per cent of previous salary (up to a limit).

Second, ensure the incentive to get back to work is strong. One way this is achieved is to time-limit dole payments. In Switzerland, benefits are cut after two years. (Other countries taper reductions in order to provide a series of nudges rather than the Swiss one-shove approach.) This gives the jobseeker time to find a suitable job and limits the sort of desperation that might lead someone to take work for which they are over qualified – something that is bad for the individual and an inefficient allocation of resources an on economy-wide basis.

Swiss policy is designed also to help, encourage and compel the jobless to look for work and increase their chances of finding jobs. This happens in the context of a one-to-one relationship with a case officer. All newly unemployed people are assigned a case officer trained in human resources and recruitment. The initial meeting, and all subsequent encounters, take place across a desk in a private office, not at a counter with a glass panel separating interviewer and interviewee, and without the indignity of a queue of people looking over the interviewees shoulder (as happens here).

At the initial meeting, the prospects of the unemployed person are assessed. Experience, skills and career objectives are all discussed and profiled. Once completed, a plan is formulated. This may or may not involve a training course. If everything is in order, the case officer okays payment of unemployment benefits.

Meetings take place on a monthly basis thereafter. The jobseeker is obliged to demonstrate he/she is looking for work, by providing proof, for example, that a minimum number of job applications have been sent. Failure to meet the agreed obligations, the rejection of a reasonable job offer or refusal to take case officers offers of training can – and frequently do – result in reduction or termination of benefits.

This kind of high quality, high intensity interaction with the system is known in the jargon as activation, and it have been shown to be effective in Switzerland and in the many other countries were it has been rolled out.

How applicable is the Swiss model to Ireland in terms of activation and benefits?

On the activation side, providing the 450,000 people now on unemployment benefit with individual case officers will be a very tall order for the new service, which is to be a merger of parts of existing entities, including Fás and the HSE. At a conference late last year, a senior official at the Department of Social Protection (who did not exude a sense of urgency about the jobs crisis) played down the potential of the new body.

If the department believes it is unable to provide the resources – and that will become clear next week when social protection minister Joan Burton unveils how the service is to work – it behoves her to look at alternatives. One way is to supplement the public activation capacity with private involvement, something that has been resisted by public sector trade unions because outsourcing of services goes against the Croke Park agreement.

If Croke Park is preventing unemployed people from getting the help they need, then – at the very least – that aspect of it should be amended. Involving private recruiters is not without its own challenges. Payment for their services is usually based on the number of cases they process. In other countries, there has been a tendency for private firms to ignore the most challenging (and in need) cases, while cherry-picking those most likely to find work (or who would have found jobs unassisted) so that revenues are maximised.

To avoid this, contract design is important. Again, best practice elsewhere should provide a guide. John Martin, an Irishman who runs the OECDs employment division and who is one of the worlds leading labour market economists, recently pointed to Australias extensive experience in designing contracts that ensure everyone’s incentives are aligned.

And what about the role of welfare payments in incentivising the taking up of employment?

In the current fiscal context, resources are not available to offer higher benefits for those who lose their jobs. And, with demand for labour so weak and so many people in long-term unemployment, it would cause real hardship if benefits were to be cut altogether after a defined period. .

What to do? There is a very strong case for a fiscally neutral change that would frontload welfare payments in the initial period of joblessness (to lessen the impact of losing an income) and taper them over time (to increase the incentive to get off welfare and get back to work).

Another important issue in how the welfare system helps or hinders job creation is the treatment of the self-employed. Currently, those who work for themselves pay lower social insurance rates than employees, but they do not have the same automatic entitlement to unemployment benefit if their businesses go under. Often they have to wait extended periods in considerable uncertainty before a means test decides whether they get access to benefits.

Fairness aside, this inhibits company formation and thereby jobs growth. To see why, consider someone on welfare and thinking of setting up a business. Not only does going it alone involve sinking savings or borrowed money into the venture, but if it doesnt work out – and most new businesses fail – it could result in the individual having more limited welfare entitlements. Ensuring that those whose businesses fail can fall into the same social welfare safety net as everyone else lessens the downside of failure. All other things being equal, that means more people with ideas for businesses will become self-employed and no longer dependent on the State.

More start-ups mean not only more work for the entrepreneurs. International evidence points to new businesses being bigger generators of employment than established companies. Given this, and the unacceptably high level of joblessness, it is imperative that State-created barriers to starting companies be dismantled.