UNEMPLOYMENT COULD effectively disappear by the middle of the decade, according to a new report by the Economic and Social Research Institute (ESRI). This is the outcome it expects under its “high-growth” scenario for the Irish economy over the decade to 2020.
However, should the economy expand along the alternative “low-growth” trajectory the institute sets out, joblessness would average 7.1 per cent of the workforce in the period 2014 to 2020.
In part reflecting the heightened difficulties of economic forecasting at a time of such change and uncertainty, the think tank has constructed alternative scenarios for future trends across a range of indicators, including employment, output and public debt.
The ESRI believes its optimistic scenario for employment is the more likely medium-term outcome owing to the flexibility of the Irish labour market. This flexibility, it says, has been strongly evident over the past 15 years.
During that period (up to 2008), the rate of job creation far outstripped the average in the developed world and joblessness all but disappeared.
The institute does, however, hint that flexibility alone may not be enough, citing the example of Finland in the 1990s. In the early years of that decade, the Nordic country suffered one of the worst recessions ever to take place in an OECD economy. Unemployment soared to 20 per cent and remained in double digits five years after growth had resumed.
To minimise the risk of such an outcome in Ireland, the ESRI repeated its call for a more activist Government approach to labour market policy.
While the ESRI’s low-growth scenario is more optimistic than the forecasts of either the International Monetary Fund or the European Commission, it represents a downward revision on the same longer-term forecasting exercise carried out by the institute in May 2009.
The revisions are entirely related to the costs of the banking crisis, which the ESRI admits it underestimated.
Most of the policy-relevant content of the report focuses on the often complicated and unpredictable relationship between economic growth and fiscal policy.
In the Irish context, however, the ESRI harbours no doubts about what is required, and is emphatic in its view budgetary tightening was and is imperative.
It believes the economy would be in a worse condition now if adjustments had not been made; that international markets would have “punished” the country if no tightening had taken place; that the Government has no choice but to adhere to the fiscal tightening package it has set out for itself; and that that package will have to be supplemented with additional measures by 2014 even under the ESRI’s high-growth scenario for the economy.
Indeed, the report suggests that a larger adjustment in 2011 should be considered. Such a front-loading of the consolidation process would drive down the risk premium Ireland pays to borrow in international markets. This could reduce debt-servicing costs and boost investment across the economy.
