A well educated workforce, plus skills brought home by emigrants, contributed to our economic success, writes John FitzGerald. The educational system will also need to take account of the changing skill needs of the economy, while ensuring that new labour market entrants have the flexibility to adapt to a developing labour market
For two hundred years Ireland's problem was too many people and not enough jobs. Over the last five years we have seen a dramatic reversal of this pattern, with labour shortages apparent from 1999 onwards.
This turnaround was not brought about by a fairy godparent waving a magic wand. Instead it was the culmination of a range of different factors, including domestic policies, which had prepared the ground over a long period.
In many ways the surprise was that Ireland was so long a labour-market failure and the success of the late 1990s can be seen as a long-delayed achievement of a normal situation. Were it not for bad policies pursued up to the 1960s and beyond, Ireland could have enjoyed some of this success at a much earlier date.
Underpinning the recent success of the economy was the gradual improvement in competitiveness, which had been going on since the mid-1980s. This allowed Ireland to reap the benefits of a belated substantial investment in education and of a consistent commitment to the benefits of European integration from the early 1970s onwards.
The growth in productivity in Ireland over the last five years, while higher than our EU neighbours', only accounted for a limited part of the exceptional growth. The full extent of the acceleration in growth was only made possible by the very rapid increase in labour supply.
A range of different factors contributed to the growth in labour supply: the natural increase in the population (largely driven by the birth rate), rising female labour force participation, and migration.
The contribution of each of these factors to labour supply growth over the past decade is illustrated in the graph.
The birth rate remained high until 1980. Since then babies have rather gone out of fashion. As a result, the number of young people entering the labour market is beginning to fall, reflecting the effects of the declining birth rate of the 1980s. Inevitably this will slow the potential rate of growth in output over the coming decade (see graph).
The second major factor driving labour supply over the last decade has been the rise in female labour force participation. While more and more young women are remaining on in the educational system, the proportion of women aged between 20 and 40 in the labour force has risen dramatically over the last decade.
In 1990, 55 per cent of women aged between 20 and 40 were in the paid labour force, whereas by 2000 it was just under 70 per cent. In addition, in 1990 4 per cent of women in that age group were students, whereas by 2000 it was 10 per cent.
In the five years 1995-2000, the single biggest factor underlying the rise in labour supply was increased female participation - contributing 1.5 percentage points a year to the growth in the potential output of the economy.
At the same time, male labour force participation has fallen, primarily because of rising educational participation.
While we are not "running out of women", the proportion who are still out of the paid labour force is much smaller than it was five years ago, so the scope for a rising female labour supply to contribute to future growth is more limited.
The women who are still out of the paid labour force tend to be older (over 40) and less skilled than their sisters who are currently in paid employment.
Having long had access to the best labour markets in the world, by the mid-1990s Ireland was itself becoming an "attractive" labour market. As a result, since 1996 we have seen substantial net immigration amounting to around a half of one per cent of the population each year. About half of the immigration has been returning emigrants, with the other half being non-Irish citizens, albeit a significant number of them spouses or partners of returning emigrants.
The transformation of the traditional diaspora of emigration into "homing pigeons" has been one of the most striking changes of the past decade.
In contrast with earlier decades, since 1980 those Irish who emigrated were generally better educated than those who stayed. Those who return are, in turn, better educated than those who emigrated and the immigrants who are not Irish have, until very recently, been even better educated than the returning Irish.
This makes Ireland most unusual in a world where migration has traditionally involved movement of less skilled labour. It is only in the last couple of years that we have seen a significant increase in unskilled immigration.
Research has shown that this influx of skilled labour has greatly expanded the productive capacity of the Irish economy. In turn, this has helped increase the demand for less skilled Irish labour, reducing the unemployment rate by around 1.5 percentage points.
This very important positive contribution from migration has also involved some narrowing in the gap between wages of skilled and unskilled labour.
A further benefit of Ireland's recent experience of migration has been that the skills and expertise acquired abroad by Irish emigrants have substantially increased the productivity of the Irish economy and the related earnings of the returning emigrants.
This shows a double benefit to the economy from the diversity of skills and experience that immigration can make available - higher productivity for those who come from abroad and more skilled labour, to allow the economy to grow faster.
Five years ago, few expected that the problem of long-term unemployment could be solved in a reasonable timescale, yet by the middle of last year the overall rate of unemployment had fallen to 3.7 per cent of the labour force, with the long-term element falling to close to 1 per cent. Firstly, this showed the benefits of the policy, pursued for more than a decade, of reducing the number of early school leavers - the potential long-term unemployed.
Secondly, it showed that most of the long-term unemployed were "employable" - all that they needed were suitable jobs at reasonable pay rates.
Thirdly, the rapid rise in unskilled wage rates and changes made in the welfare system (such as the increased priority for child benefit) helped increase the relative returns from employment.
While the exceptional growth of the past five years can be explained partly by labour supply factors, looking to the coming decade it is clear that the economy must slow. Changing labour market circumstances will also pose new challenges.
Over the coming decade those in the population who will be at an age when they are likely to have children will rise rapidly. This is going to pose major issues for society.
Having been educated to participate in the paid labour market, the difficulties of managing parenthood with paid employment will begin to hit. This will pose new challenges, not just in terms of childcare, but also raising questions on how "family- friendly" we want to make the workplace and society generally.
While it has been clear since the mid-1990s that Ireland is one of the most attractive labour markets in the world, policy has been slow to adapt to these changed circumstances. The influx of skilled immigrants has greatly enhanced the productive potential of the economy but we have yet to put in place a comprehensive policy on migration.
Developing the welfare system in a way that provides a satisfactory safety net while not interfering in labour market outcomes has always been a balancing act.
WITH the rapidly changing labour market this will be at least as complicated as in the past. With the fall off in the number of young labour market entrants, the economy will gradually become less flexible. When a high proportion of people are in education they can adapt rapidly to the changing skill needs of the population.However, as people age they are less likely to adapt to the changing demands through returning to education.
The success of investing in education is now realised. However, the need to achieve further progress in tackling the problem of early school leaving remains crucial.
The educational system will also need to take account of the changing skill needs of the economy, while ensuring that new labour market entrants have the flexibility to adapt to a continually developing labour market.
In addition, the proportion of students who are working part-time has risen dramatically. Potentially, this could have an adverse impact on educational attainment.
Finally, the success of the economy in the future will, as in the past, depend on maintaining its competitiveness in an ever-changing global environment.
John FitzGerald is a research professor at the Economic and Social Research Institute
Tomorrow in Weekend: Kathy Sheridan examines what consumers did with their boom money; Commentary by Fintan O'Toole