Worst, best, worst: Ireland's extraordinary labour market

ECONOMICS: Ireland's record in job creation has been by turns astonishing, miraculous and inevitable

THE HISTORY of Ireland’s labour market is infuriatingly unique. Since the middle of the last century, there have been three distinct periods in that history: the 1950s to 1989; 1990 to 2007; and the period since the economy crashed – a period that is, alas, ongoing.

Among the economies of the Organisation for Economic Co-operation and Development, Ireland has the extraordinary record of having in each of those periods respectively the worst, the best and the worst record on employment creation.

The first period is perhaps the most extraordinary, and the most difficult to explain. Uniquely among the countries of the OECD, the Irish economy generated no increase in employment over three-and-a-half decades.

According to OECD figures, there were 1,111,600 people at work in Ireland in 1956, the first year for which figures are available. In 1989, employment was down to 1,098,500. No other country – not a single one – experienced shrinking employment over that period of economic transformation in the western world.

This astonishing failure came despite unusually high fertility rates and an increase in women working outside the home. It also happened despite the absence of the kind of heavy-handed labour regulation that typically prevents employers from taking staff on – the OECD economy with the second worst employment record over that period was Italy, where such regulation has been commonplace.

But even with employment-killing regulation, Italy achieved net job creation, as did other countries with bad labour market institutions. Both Spain and Greece managed to grow employment by a little over 10 per cent in the 1956-89 period. Portugal experienced an expansion of one-third in the numbers at work.

It should be added, however, that regulation is not the only determinant of job creation. Britain and the US have typically had low levels of job-inhibiting rules, but they had very different experiences in the 1956-89 period. The former experienced an increase in employment of 15 per cent; the latter enjoyed jobs growth of 84 per cent.

Ireland’s long-term record on employment from the vantage point of 1989 gave reason to believe the economy was doomed forever to remain a stagnant backwater.

But then everything changed, as the first chart illustrates so clearly. What followed was a period of near miraculous employment growth.

A burst of jobs growth in 1990 was killed off by the international downturn and – familiar as it may sound – a breakdown in Europe’s mechanism to manage currencies. But growth resumed in 1992 and the numbers at work rose uninterrupted for 15 straight years. And this in an economy that had managed only three consecutive years of jobs growth since mid-century (a feat achieved artificially in the late 1970s, on the back of unsustainable stimulus).

The famine-to-feast pattern of employment creation resulted in Ireland going from worst performer in the OECD to the best. From 1989 to 2007, the numbers at work rose by 92 per cent, with Luxembourg (+85 per cent) and Spain (+66 per cent) in second and third place.

Those halcyon days now are gone. From the time the numbers at work in the economy peaked (in the final quarter of 2007) to the third quarter of 2011, net employment fell by 350,000. That amounts to a 16 per cent decline. In other words, one in six jobs in net terms that existed four years ago has disappeared.

If that sounds huge, it is. Yet again, Ireland has swung back to the wrong end of the OECD employment-growth league table. Spain is the only country to come close to Ireland’s level of job destruction, and for largely the same reason – a burst construction bubble.

The second chart shows the sectoral change in employment from the peak to the most recent quarter for which figures are available (the 12 sectors included account for almost 95 per cent of employment).

The once bloated construction sector, which had come to be the third largest employer at its most extended point, has seen employment cut by more than half.

The only thing surprising about the decline is that it hasn’t been even more dramatic. Output in the sector has fallen by more than employment, and the industry’s prospects well into the future are poor, owing to an oversupply of housing and the appropriately, if unfortunately, small amounts the Government has allocated to the capital budget out to 2015.

More surprising have been developments in industry. Ireland has a larger than average percentage of its workforce in the manufacturing sector, owing to the presence of foreign multinationals. Despite manufacturing output hitting a record high in October 2011, the numbers at work are down by almost one-fifth in four years.

That is explained by strong productivity gains, meaning fewer workers are needed to produce a unit of output, and output growth being concentrated in less labour intensive sectors, such as pharmaceuticals.

More perplexing are the much larger declines in employment in agriculture, forestry and fisheries. With global food prices at unusually high levels in recent years, the sector’s output has been soaring for two years. This may translate into jobs, but it has not done so yet.

Only three of the 12 sectors have registered increases in employment since the recession took hold. Two of the three are health and education – now the second and fourth largest sources of employment respectively. They are predominantly, but not exclusively, peopled by public servants. The public sector is being downsized. These increases will be reversed.

Only one sector that is almost entirely private showed an increase in employment over that period. The information and communications sector, which is the smallest employer of the 12, added just 2,900 net jobs.

The third phase in the recent Irish labour market is not yet over. The question for the fourth phase – whenever it begins – is whether it will resemble more closely the first or the second.