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The following OECD assessment and recommendations summarise chapter 3 of the Economic Survey of Ireland published on 4 November 2009.
There is a risk of high long-term unemployment without more effective policies towards the unemployed
Labour market conditions have deteriorated rapidly in the downturn. Employment has fallen, and the unemployment rate has risen sharply and is now at a high level. The Irish labour market is flexible in terms of regulation and a remarkable reduction in the level of nominal wages appears to be underway. However, there is a risk that high rate of unemployment could be sustained due to a combination of weaknesses in activation policies and replacement rates from unemployment benefit for those with below average wages that are likely to become even higher as wages fall. Unemployment related social benefits should be reduced in line with falling prices and disincentives to return to work avoided. Consideration should be given to allowing benefits to fall as the duration of the unemployment spell increases. Ireland is unusual in the number of agencies involved with helping the unemployed: a single organisation should deal with paying unemployment benefits and managing activation programmes. Under the National Employment Activation Plan, activation requirements are an important part of helping the unemployed back to work. This approach should be strengthened by requiring early and regular interaction for all unemployed with the employment services and improving follow up, backed by stronger sanctions. Claimants should ultimately be required to enter an effective work programme if other options are not taken up. The large rise in the number of unemployed has fundamentally changed the profile of this population. Active labour market policies targeted at job search, raising employability and keeping the unemployed close to the job market should be further modified and expanded to meet these needs, while taking into account fiscal constraints. Costly existing programmes, such as the Community Employment scheme, should be limited. The minimum wage is high by international standards and may become more binding as wages fall. The level of the national minimum wage should be re-assessed, and reviewed on an annual basis. The system of sectoral minima should be re-considered.
The fall in labour demand is leading to net outward migration, a reversal of the strong inward flows of recent years. The number of foreign nationals in the workforce, however, will remain higher than it has been historically. Continued efforts will be required to ensure their successful integration through providing appropriate training and to continue to attract highly skilled workers with specific skills that are needed in Ireland with multiple entry visas.
Helping those with weaker labour market attachment
Some groups continued to have low rates of employment even during the years of strong labour demand. It is common experience in OECD countries for these groups to have more marginal attachment to the labour market and to be more vulnerable to slowdowns or unfavourable policies. The incentive to work for those with below average earnings potential would be enhanced by eliminating high taper rates and moving towards a single social payment for working-age adults to simplify the system, improve the incentive to work and strengthen activation requirements. To boost female participation, support should be more targeted at those who work. The impact of higher tax rates on second-earners should be carefully assessed and consideration given to moving to full individual taxation. Lone parents have particularly low employment rates, which contributes to high rates of poverty among these families. Greater support should be provided to lone parents, by raising their priority in access to childcare, and they should be required to seek work once their children reach school age. The number of disability benefit recipients has increased rapidly to reach a substantial share of the working age population, while employment rates for those claiming these benefits are low. There is a risk that this could become a pathway away from the labour market, especially for older workers. Assessment for eligibility to these benefits should be carried out independently and include an assessment of work capacity. Illness benefit should not last more than one year. Incentives and support for those with disabilities to participate in the workforce should be improved and consideration should be given to extending conditionality to some. Engagement with this group needs to be more systematic and focussed on access to mainstream employment.
Young people have been severely hit by the contraction in labour demand and higher unemployment. Those with less experience are also more vulnerable to the relatively high benefit replacement rates and minimum wage. Training and activation measures will need to focus on this group. Early school leavers and those with limited education are particularly prone to being neither in the labour force or training. In addition to enhanced training and activation measures, consideration should be given to raising the school leaving age to 18. The employment rate falls off sharply for older workers and there is a risk that job losses now will be permanent. Stronger activation measures would provide more encouragement to those close to retirement to find new jobs. Tax and benefit incentives to stay in the workforce beyond age 65 should be improved.
How to obtain this publication
The complete edition of the Economic Survey of Ireland is available from:
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.
For further information please contact the Ireland Desk at the OECD Economics Department at email@example.com.
The OECD Secretariat's report was prepared by Sebastian Barnes under the supervision of Patrick Lenain. Research assistance was provided by Annette Panzera and Joseph Chien.