Employment and Deflation in Ireland

Introduction

Background study

The Irish government has been facing a major economic test following the economic meltdown that had rocked the country since the beginning of 2008. According to the Economic and Business Analysis, Ireland become the first country in the Euro Zone to be plunged into the recession since the sublime home loan crisis that sparked a global economic meltdown 25 years ago. This has been occasioned by the high rate of deflation and subsequent loss of employment.

Aim

The study of Ireland’s economy, about employment and deflation, tries to underpin the devastating of the two episodes. Deflation and employment are closely related since the occurrence of one leads to the other one.

Scope

To fully appreciate and understand the effects of deflation on employment, our study “Employment and Deflation in Ireland” explores several areas which cover the issues of study. We cover unemployment in Ireland, causes of unemployment, deflation, causes of deflation, effects of deflation and the relationship between employment and deflation.

Employment

Although the data obtained from the Central Statistic Office of Ireland (CSO) year 2004 to year 2009 shows that majority of Irish are employed, there is a general trend in the increase of unemployment. This is caused by the deteriorating economy that is not able to sustain people in the job market (Central statistic Office-Ireland 2010). In Ireland the unemployment is also characterized by high birth rate, where the market is unable to absorb everyone in the employment. Although Ireland was experiencing mass production of products in the 19^th century, this was not reflected in the economic growth pattern. In fact, most scholars attribute this increase in production as a result of increase in output per worker. In the Irish case, productivity and output increased while employment decreased in some cases.

Causes of unemployment

• Rigid real wage: This means that in the labor market, the real wage does not vary. That is, the excess supply in the labor market will not be affected by changes in price levels within certain periods. As a result, there will be unemployment which will continue to thrive till restoration of self-equilibrating process of labor market. In this analysis I am going to examine why the wage rate is sticky (Keynes, 2004, p 60). There are two main reasons for this. First, the capacity of downward adjustment of wages by firms is limited due to existence of various factors that affect wages and existence of trade unions. Secondly, employers maintain high and non-clearing wage levels to ensure that the firm is efficient. Rigid real wages are essential in the labor market for the sake of both the trade unions and employers in bargaining for higher wages. Due to this unionization of the economy, the trade unions become very powerful, and there is an upsurge in the wage demand resulting in higher unemployment.
• Cyclical unemployment: Increase and decrease of GDP cause Ireland cyclical unemployment. When the GDP is higher, the level of unemployment goes up at the peak of the business cycle. When the GDP falls, there is a substantial creation of employment. However, cyclical unemployment should be periodical, since if the rate stretches an extended period, it can cause irreparable damage to the labor force of Ireland.
• Rigid labor demand: Employment protection legislation dampens jobs’ creation rate because of the many rigid regulations and high firing costs imposed during Legislation. Despite the existence of various job protection legislation, such legislations limit firm’s ability to recruit new employees. However, absence of such legislation may result in unorganized employee hiring and firing procedures. Keynes, (1936, p.67) asserts that the resultant effect is a decline in average employment. This means that legislation results in persistence of unemployment. Since dismissing employees is very costly, employers ought to be very careful when hiring workers so that they hire those with expected skills and enough experience. For instance, hire people who are already working elsewhere than hire those who have never been employed before.
• Hardcore unemployment: this is usually lack of employment due to disability and not being in a position to discharge duties as required. This is not common in Ireland and accounts for only a small percentage of unemployment.

Technological change

The resultant effect of technological advancement is an increment in there of economic growth culminating in improvement in general living standards. This is a long-term effect. On the other hand, the short-term effect of introducing new technology is unemployment (Behrens, 2001, p.150). Different sectors of economy face different issues concerning employment which include

• Changes in skills
• Shifts in demand in relation to skilled employment (for example skills required by various industries) (Hayek 1989, p.490).

Moreover, the gap between those with suitable skills and those without continues to increase leading to unemployment.

Different Measures of Unemployment in Ireland

Labour Forces Estimates-Historical Approach

Labour force estimates compiled up to the mid-1970’s up to 2009, were based on the periodic stocktaking counts given by the census of population. The estimates for intercensal and postcensal years were based on interpolations, using the range of relevant indicators available (Central Statistics Office Ireland 2010). The census-based labor force estimates were derived from the respondents’ statements of their “usual principal occupation” in conjunction with a description of the “employment status”, and the name and nature of business of the employer. This is used as an indicator to show the number of employed people and the unemployed. The estimates also tabulate all sections of the economy and show which sectors employ majority of Irish. The estimates for 2004-2009 show industrial sector as the leading sector in offering job opportunities.

Based on the subjective information in respect of the usual situation given on the census questionnaire, each person is classified to being either “gainfully occupied”, or not gainfully occupied”. The latter category consists of those who deem to be inactive in the context of the labor force. Each gainfully occupied person was further classified as being either “at work” or “unemployed”.

Labour Force Surveys

A number of countries are basing their labor force estimates on the results of labor force surveys. Ireland has been using the method since 1975 up to date. The Irish LFS is a large sample household survey carried out on an annual basis in April/ May and covers about 45000 households. In contrast to the self-completion approach used in the census, the LFS is carried out by a team of specialty-trained interviewers. This approach allows a carefully inter-linked set of detailed questions to be included on the questionnaire from which valuable structural information on employment and unemployment can be obtained.

Government Policy and Possible Strategies of Fighting Unemployment and Deflation

The Ireland government in responding to deflation has instructed the Central Bank to increase the amount of money in circulation. This allows more people to invest, thereby generating employment opportunities. In 1970, like most west European countries, Ireland responded to the oil crises by increasing inflation. Some of the policies which could help fight unemployment are “an improvement in the employability of the labor supply”. This emphasizes the need to equip the unemployed with the relevant skills so that they can take up the jobs when the opportunity presents itself (Bordo & Filardo, 2005, p.47). Another policy to end unemployment is an improvement in the incentive for people to search and then accept paid work. This involves the government reducing taxation and providing benefits systems. Another policy is a sustained period of economic growth. This ensures that there is no deflation for quite some time. During that period, the economical growth should consequently be followed by increase in the number of the people employed.

Improving skills and reducing occupational mobility. The government should introduce policies that provide the unemployed with the skills they need to find re-employment or seek employment in other areas. The unemployed should also be coached on how they can venture into their own jobs once they have acquired the skills (Bohning 1984, p.230). Improvements in the quality of education provided would increase the human capital of the workers. This would eventually create a multitasking community and a flexible pool of employees.

History of National Trend in Unemployment and Deflation

Apart from the great recession which affected almost every country in the world, Ireland has been hit severally by economic recession. In the 19^th century there was an oil crisis that affected its economy. This was also followed by sharp increase in the number of unemployed people. In 2008, there was a high notch of economic recession. According to the CSO, Ireland’s economy that was rocked by a domestic property market meltdown slowed down its activities for the first time in 25 years after shrinking in the second quarter of 2008.In the second quarter of 2008, the Irish GPD dropped by 0.5% as compared to 0.3% drop in the previous three-month period (Central Statistic Office- Ireland).

According to a report by AFP, there was a major construction melt-down and surging unemployment, a situation that was expected to push its way up to 2009. Some of the major causes for Irish economical recession have been attributed to the international credit wrangles, sky-high oil prices and strong Euro currency. About employment, there has been a considerable rise in the number of unemployed people in Ireland (AFP, 2004, p.4). This has been happening from 2004 up to 2oo9. This could have resulted from high birth rate and improved technological advances. The former increases the number of people looking for employment in already saturated market. Advancement in technology requires only people with the requisite skills in running the machines. This improves quality and increases production but reduces the number of people required, resulting in unemployment (Blinder, 1987, p. 80). In 2009, the number of unemployed people had sky-rocketed to unexpected level. This was a result of the deflation.

Deflation

When we have a deflation, there is a resultant decrease in commodity prices.

Causes of deflation

The demand for products and services falls as the consumers wait for the products to decrease in price. According to economists, the effects of deflation is far adverse than the effect of inflation. Although both of them signal unfavorable economic periods, deflation is most feared. Deflation is characterized by fall in prices of virtually everything. This adversely affects the marginal efficiency of capital (Goodhart, 2004, p.14).

Deflation creates paths for depression. In a state of depression, there is a decline in economic activity, less production of goods, output shrinks, and people stop investing. By reducing aggregate income, unemployment rises.

Reducing prices of goods increases consumers’ purchasing power.As a result, the level of unemployment and income continues to decrease. The effects and occurrence of deflation are hard to control as opposed to inflation. Once deflation is a common occurrence in a company, the business pessimism increases while the marginal efficiency of capital diminishes and as a result a severe depression occurs automatically. During depression, it is impossible to revive the price level of goods and expectations of the business despite the many monetary policies that we may try to use.

Conclusion

Economic sustainability of a country can be measured by the number of people employed in either the formal or informal sector. A country with a higher rate of employment is at a lower risk of suffering deflation. The effects of deflation are more devastating than those of inflation although both of them have detrimental effects, especially where the magnitude is high. Policies like pumping more money into the supply can help regulate deflation, but cannot stop deflation. Although deflation is characterized by a reduction in the prices of commodities, most people are not able to buy at their full capacity since manufacturers are not willing to produce mass products.

Reference List

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