Ireland is now, along with the US, experiencing effective full employment. A few years ago full employment was put at 5 per cent; that was revised to 4 per cent and now that unemployment has fallen to 3.8 per cent, the target is 3 per cent.
It seems almost impossible that, about 10 years ago, the OECD declared structural unemployment in Ireland would never go below 10 per cent. But the bigger question is whether such low unemployment will lead to increasing price pressures. In economic terms, is the rate consistent with non-accelerating inflation? Commentators would probably agree it is below that rate.
According to Prof John FitzGerald, research professor at the ESRI, this is the best news ever on employment. He said that previously when the rate was so low there was mass emigration - now it is low with immigration. The downside is there are no longer many unemployed people to take up new jobs.
Prof Brendan Walsh, of UCD, says the labour market is no longer in equilibrium and is not consistent with any kind of stability. "It's a blank cheque in terms of pay," he noted. "In effect workers can now write their own cheques. That will lead to wage inflation which will overshoot."
Both Prof Walsh and Prof FitzGerald agree it is wage inflation rather than the consumer price index which is worrying. The former could feed rapidly into expectations for further wage rises.
In the meantime, the economy will have to slow down. According to Prof FitzGerald, around one percentage point of recent growth rates has been the result of increased labour force participation among students, which is now close to capacity. Another point was the result of people coming off the live register, again at capacity.
As a result economic growth next year is likely to be two percentage points lower than it would otherwise be, he said. Low levels of unemployment will also slow the economy as rising wage rates dampen competitiveness. Prof FitzGerald says this is not yet a problem: "If 10 per cent wage rises this year are followed by 10 per cent next year and the year after, there will be a problem.
"It is a bit like Waterford Glass in the 1980s. The company did very well when the dollar was strong and wages rose. When the dollar collapsed the company nearly went out of business." Prof Walsh we says we must "face up to the idea that zero unemployment is not on. There has to be some [unemployment] which will act as a cushion".
