The following OECD assessment and recommendations summarise Chapter 6 of the Economic Survey of Ireland 2006 published on 2 March 2006.
Ireland’s labour supply is unusually elastic because it has been able to draw on its large diaspora community and it is one of three EU15 countries to have opened its doors to the new EU members. Since 2000, these two sources have added around 1% to the working-age population each year. This has been supplemented by a substantial increase in labour force participation by women. Despite this increase, female participation rates remain below the OECD average for all except the under-thirties. Cultural attitudes and low educational attainment among older women are factors, but policy settings play a role as well. The current tax-benefit system was appropriate when its main aim was to reduce poverty but reforms are needed to give all parents a good chance to engage in paid work if they prefer to do so:
Child support is paid whether the parents are working or not. In order to help families, the 2006 Budget introduced a new cash transfer for families with young children. Similar to the existing Child Benefit, the Early Childcare Supplement is paid universally regardless of parents’ labour force status and regardless of whether they are purchasing childcare services or not. This is an extremely expensive solution that involves considerable deadweight costs, but was chosen to reflect public preferences for not discriminating against mothers at home. From a labour supply point of view, it would be more effective if over time childcare supports such as the Early Childcare Supplement became linked to employment status or to the use of formal childcare. It is important to realise that this approach would not discriminate against mothers at home but rather eliminates the bias against mothers at work that is built into the current system. The Home Carer’s Tax Credit should be phased out as it is a direct subsidy to staying at home.
A mixed strategy of demand and supply-side measures is needed to expand childcare capacity. Ultimately, policy should focus on the demand side of the market through measures to make childcare more affordable for parents. By providing funding directly to parents (tied to the use of childcare), they will be better able to choose public or private facilities that best match the needs of their family. But these measures would need to be phased in to allow time for supply to expand in order to avoid inflationary pressures. In its latest Budget, the government is supporting the creation of 50 000 extra childcare places by 2010. Plans to increase the number of training places for childcare workers are welcome and should be implemented swiftly.
The income tax system contains elements of individual and joint taxation. Therefore, even though they have been reduced significantly over recent years, marginal tax rates on second earners are higher than need be. This may explain why a relatively small number of second earners work full time. The government should consider moving to individual taxation to make the system simpler and more neutral.
Women with children have relatively low employment rates1
Persons aged 25 to 54 years, 2000
1. Children aged under 15 (16 for Sweden).
Source: OECD (2002), Employment Outlook, Paris.
Ireland has a large number of sole parents and their employment rate is low. This reduces labour supply, but more importantly it contributes to child poverty: nearly half of children in non-working single-parent families live in consistent poverty. International experience shows that the most effective way to reduce child poverty is for the parent to be working. Ireland should move away from passive income support and instead move to a mutual obligations approach to assist and encourage single-parent mothers to find a foothold in the labour market, at least once their children have reached a certain age. Options include reducing the phase-out rate of the One Parent Family Benefit (because it creates a low-activity trap) and allowing parents who return to work to keep some of their other benefits such as the rent supplement and free medical care (perhaps for a limited time). As part of this package, job-search requirements should be increased for sole parents whose children are at school. Of course, most of this would have to wait until job support, childcare and out-of-school-hours care programmes are expanded.
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Return to the Economic Survey of Ireland 2006
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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 David Rae and Boris Cournède under the supervision of Peter Hoeller.