The unemployment crisis: A modest 0.7% response

During periods of enforced unemployment, where the private markets cannot employ people who want to work, the state should employ people until sufficient job creation commences. By Michael Taft.

Even the Government admits their policies are having little effect on job creation. They expect unemployment to remain at 13% by 2015, a fall of only one percentage point since they took office. The number of people at work will only grow by 12,000 over the lifetime of this government. Truly, we are into a period of medium-term stagnation.

A number of analysts have rightly called for a sustained and substantial programme of investment. This would boost growth in the medium-term while putting people back to work in the short-term.  But it cannot, alone, fill the jobs gap – especially for those seeking to participate in the service sectors of the economy. There need to be complementary strategies.

David Begg, General Secretary of ICTU, recently provided one of them. Speaking at the TEEU annual conference he said:

“I would say that ultimately the State must be willing to contemplate being an employer of last resort through local authorities or social employment. The lessons of the Great Depression may have been lost but they are as valid in social terms now as they were in the 1930s. No country, no society can afford to regard so many of its unemployed citizens as expendable.”

The state as Employer of Last Resort (ELR) – that’s a considerable intervention. The concept is simple: during periods of enforced unemployment, where the private markets cannot employ people who want to work, the state should employ people until sufficient job creation commences.

An ELR programme would employ people through the mainstream public sector, local authorities, or community, voluntary and non-profit organisations on socially beneficial projects. There are a number of questions over how this would work. I will focus on two and, in so doing, start the work of outlining an ELR programme.

What kind of work?

An ELR programme would, in the first instance, be targeted at the long-term unemployed. Being out of work for extended periods diminishes people’s capacity to return to the labour market and erodes their skill base; this is in addition to the negative individual and social consequences (which have measureable economic costs) that people experience.

The first step would be to conduct an audit of work opportunities in the public and voluntary sectors: community development and outreach groups, children and youth services, sporting groups, education supports and assistants, childcare, eldercare, drug rehabilitation and ex-offender support services, environmental supports, parks and leisure activities, community health groups, homelessness, neighbourhood regeneration, public safety, etc. The list goes on.

Second, the Government would mobilise public agencies and community/ voluntary groups to participate in this programme – in concert with trade unions and management in the public and civil society sectors. Groups and agencies would submit proposals to employ people on specified projects, which would be vetted to ensure the work meets benchmarks that stress social value-added, while eliminating labour displacement, market distortions and deadweight.

Third, the employment programme would be rolled out –with temporary contracts paid by the state: one year, 18 months, two years - whichever is deemed appropriate. This could be co-ordinated with training agencies for each individual. For instance, a person may get a contract for 32 hours work a week but also for eight hours training which could be for work or personal skills.  Therefore, an ELR programme could combine both work and training in a drive to both employ and upgrade skills.

How much would this cost?

A worker on an ELR would be paid a decent wage. Some proponents suggest this should be at the minimum wage but there are arguments for putting the wage slightly higher – to incentivise take-up and act as a new, if ad hoc, floor to wage-setting. A participant would retain secondary benefits on the scheme (payment for adult dependents, eligible for Family Income Supplement, back-to-school payments, medical cards, etc.).

A weekly 39-hour contract of work/training could be set at €9 per hour, or €18,250 annually. An additional 15% would be added for training costs and administration. To employ 50,000 through an ELR programme would cost approximately €1.05 billion a year.

This is, however, only a headline rate. Let’s go through two types of ‘back-of-the-Excel-sheet’ calculations to assess the final cost to the state. The first is a per-employed estimate.

(a)  There would be a reduction of 50,000 social protection payments. A rough estimate would be €481 million. This figure may be slightly on the high side since not all people moving from the Live Register to an ELR job would be on €185 a week (e.g. young people, lower payments due to means-testing, etc.). So let’s reduce this to €450 million.

(b)  On average, a person on the ELR wage of €18,250 would return to the Exchequer €946 in income tax and USC. This would come to, in total, €47.5 million.

A reduction in social protection costs and an increase of tax revenue would come to approximately €500 million. But there’s more.

(c) A person in ELR work would, on average, experience an increase of €7,700 in disposable income. Most of this would be returned to the economy through consumer spending, increasing VAT/excise revenue. Just as important, business turnover would increase – which could lead to job creation/retention. This would be an additional gain to the Exchequer.

There are further revenue potentials when we factor in:

  • The expenditure on training, which is labour dense
  • The savings from reducing the economic/social costs of long-term unemployment
  • Employers’ PRSI: ELR jobs in the public sector would just involve a transfer within public agencies but voluntary sector jobs would raise €1,962 per employee in PRSI. This could increase revenue by approximately €50 million, if half of all jobs come via the voluntary sector
  • The supply-side, or social value-added, benefit from ELR programmes – the benefits from increased resources to drug rehabilitation schemes, literacy programmes, unemployed supports, training for lone-parents. These all have positive economic knock-ons.

If we just focus on savings from social protection reductions and increased tax revenue, an ELR programme would cost €500 million. And the risks to this are on the upside since we’re not including the impact on consumer demand, revenue from training, employers’ PRSI and other savings listed above.

A second calculation can be based on the ESRI’s estimate of the impact of Government wage consumption on the economy. €1 billion expenditure would result in GDP rising by €1.28 billion.  The Department of Finance estimates that this would, on average, reduce the deficit by approximately €600 million. This would result in a cost of €400 million.

So, the cost to the state from employing 50,000 people would be somewhere in the region of €400 and €500 million, with the potential of the cost being lower. This amounts to 0.7% of total government spending.

Where do we get the money?

That’s the easy part. There are three main sources.

  • The Government is holding over €18 billion in cash, which even they admit is in excess to what would normally be required. €400 to €500 million could be diverted into paying for an ELR programme with only a minimal impact on our liquidity buffer. This would entail no extra borrowing, taxation or compensating spending cuts in other programme.
  • The Government is proposing a tax package of €1 billion. Claiming our Future has compiled a list of tax measures of up to €7 billion, mostly on high income groups and unproductive activity. There’s a range of measures that could pay for this without any resort to borrowing.
  • The cost of temporarily reducing the low-rate of Employers’ PRSI and the low VAT rate will be €533 million in 2013. Withdrawing some of this reduction would free up resources for investing in direct job creation – a better outcome than giving subsidies to companies that are laying people off.

Gathering resources from these sources (and there may be more) would quickly raise €400 to €500 million, with little negative impact.

* * *

We can put 50,000 people back to work within the next 12 months. It would take that long to get the ELR programme off the ground. This wouldn’t transform the employment crisis overnight; but it would reduce long-term unemployment by over 25%. Nor is it a long-term solution. In the long-term we must look to the indigenous sector’s ability to create jobs – both public and private - augmented by foreign direct investment.

But combined with a strong investment programme and an end to reductions in public sector employment (which has been shown to have hardly any impact on the deficit but a dreadful impact on the domestic economy), an ELR could make a major contribution to putting people back to work, keeping them in contact with the labour force – and creating social value-added in communities throughout Ireland.

Isn’t that worth the fractional price of 0.7%?

Image top: