the labour market and the new budgetary framework thomas conefrey irish fiscal advisory council dper...
DESCRIPTION
Current context Ireland exited official assistance programme at the end of Expected to exit the corrective arm of the SGP in From 2016, Ireland’s budgetary policy subject to the requirements of the preventive arm.TRANSCRIPT
The Labour Market and the New Budgetary Framework
Thomas ConefreyIrish Fiscal Advisory Council
DPER Labour Market Policy Symposium19 May 2015
Overview• Context• What’s the link between labour market and
fiscal rules?• Ireland’s new fiscal framework• The structural balance • Potential output measurement challenges• Improving labour market inputs• Long-term issues
Current context• Ireland exited official assistance programme at
the end of 2013.• Expected to exit the corrective arm of the SGP in
2016.• From 2016, Ireland’s budgetary policy subject to
the requirements of the preventive arm.
New Fiscal Framework
• Preventive arm assessed under 2 pillars:1. For countries not at their MTO a minimum improvement in
the structural balance of at least 0.5pp of GDP is required.2. Expenditure benchmark complementary to structural
balance rule. EB designed to ensure public expenditure grows at a rate below economy’s long-run potential growth rate.
• Rules given effect in Irish law through the Fiscal Responsibility Act (2012) and Ministries and Secretaries Amendment Act (2013).
European/National fiscal rules
National
European
Corrective Armof SGP
Preventive Armof SGP
3% Deficit Rule
1/20th Debt Rule
MTO / Adjustment path to MTO
Expenditure benchmark
National Budgetary
Rule
National Expenditure
Ceilings
National Budgetary Rule Consistent with Preventive
Arm of SGP
National Expenditure Ceilings Consistent with Expenditure Benchmark
Potential output and structural balance now centre stage
• Appropriate target for fiscal policy is structural balance.
• Structural balance is an indicator of the surplus/deficit in the government accounts adjusting for the cyclical position of the economy.
• However...estimating the cyclical position of the economy is difficult!
• Much focus to date on EC harmonised method.
Harmonised method
• Production function approach used:• Y* =
• Of interest here is how labour (L) determined.• Labour input in harmonised method
determined by:• L = Popw * LFPR * (1 – NAWRU) ) * Trend Hours Worked
• Key inputs: projections for LFPR and NAWRU
Unemployment Rate and NAWRU
19811983
19851987
19891991
19931995
19971999
20012003
20052007
20092011
20132015
20172019
0.02.04.06.08.0
10.012.014.016.018.0
actual NAWRU
per c
ent
MIGRATION, UNEMPLOYMENT AND NAWRU ESTIMATES
19651967
19691971
19731975
19771979
19811983
19851987
19891991
19931995
19971999
20012003
20052007
20092011
20130
2
4
6
8
10
12
14
16
18
-5
-4
-3
-2
-1
0
1
2
3
4
NAWRU*Actual UnemploymentMigration (inverse) as % of total labour force (RHS)
%
% o
f tot
al la
bour
forc
e
Sources: AMECO; Eurostat and IFAC internal calulations.* EU Commission estimates as of Winter 2014 forecasts.
Labour Force Participation • Forecasts extended
using simple AR model
• Data for full period then filtered using HP filter
19811985
19891993
19972001
20052009
20132017
50.052.054.056.058.060.062.064.066.068.070.0
actualsmoothed
per c
ent
Procyclicality
19811983
19851987
19891991
19931995
19971999
20012003
20052007
20092011
20132015
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
Actual Output PF Potential Growth NAWRU
Other approaches• Statistical filters:
– No economic content, largely arbitrary specification of parameters
• Multivariate filters:– IMF conditioning relationships e.g. Philips curve, along assumptions about
various “balances” e.g. Current account, credit, NAWRU (!)
• Cyclical indicators:– OBR: weighted average of survey indicators of recruitment difficulties and
capacity utilisation; principal component analysis
• Cost functions– ESRI HERMES/COSMO: high elasticity of labour supply in Ireland, fall in
potential output partly reflects erosion of the capital stock
A way forward?
• Approaches discussed up to now could be greatly improved by better estimates of key underlying parameters:– “Equilibrium” rate of unemployment– Labour force participation
• Could a microdata approach help?• Some key questions:
– How might current composition of unemployed impact equilibrium unemployment rate?
– Mismatch in labour market– Labour force participation
Unemployment as % of Total Labour Force by Duration
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
0
2
4
6
8
10
12
14
16
All1yr+2yr+4yr+%
Long-term unemployment by previous sector of employment
0 5 10 15 20 25 30
Agriculture, forestry and fishing (A)
Industry (B to E)
Construction (F)
Wholesale and retail trade, repair of motor vehicles…
Transportation and storage (H)
Accommodation and food service activities (I)
Information and communication (J)
Professional, scientific and technical activities (M)
Administrative and support service activities (N)
None
Public administration and defence, compulsory social…
Education (P)
Human health and social work activities (Q)
Other NACE activities (R to U)
Mismatch?
TotalIndustry (except construction)
ConstructionWholesale and retail trade; repair of motor vehicles and motorcycles
Transportation and storageAccommodation and food service activities
Information and communicationFinancial and insurance activities
Real estate activitiesProfessional, scientific and technical activitiesAdministrative and support service activities
Public administration and defence; compulsory social securityEducation
Human health and social work activitiesArts, entertainment and recreation; other service activities
0 0.5 1 1.5 2 2.5 3
2014Q22009Q1
Employment rate + productivity?
19951996
19971998
19992000
20012002
20032004
20052006
20072008
20092010
20112012
20132014
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Total Males Females% o
f 15-
16 p
opul
ation
Longer-term issues• Population ageing likely to create significant
challenges in the medium term.• Implications for labour market, public finances,
health, pensions etc. • Preliminary work on building long-term
demographic model.• Use CSO life tables along with assumptions on
fertility, mortality, migration, participation to project population by single year of age.
Dependency Ratios
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 20200.0%5.0%
10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%50.0%
Old age dependency ratio (70+) Youth dependency ratio (0-14)Total dependency ratio
% o
f wor
king
age
pop
ulati
on
Population structure
0-45-9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-84
85+
-10.0 -5.0 0.0 5.0 10.0
Age and Gender Distribution 2010 Females
Males
%
Age
Coho
rt
0-45-9
10-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-7980-84
85+
-10.0 -5.0 0.0 5.0 10.0
Age and Gender Distribution 2020
FemalesMales
%
Age
Coho
rt
Conclusions• Concepts of potential output and structural balance
important underpinnings of Irelands new fiscal framework.
• Much scope for improving measurement and estimation of key labour market inputs.
• A microdata perspective could help complement existing approaches.
• Long-term demographic change an important area for further analysis.