Transcript Labour Market New Fiscal Framework

The Labour Market and the New Budgetary
Framework
Thomas Conefrey
Irish Fiscal Advisory Council
DPER Labour Market Policy Symposium
19 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
European
National
Corrective Arm
of SGP
Preventive Arm
of SGP
National Budgetary Rule
Consistent with Preventive
Arm of SGP
1/20th
Debt Rule
3% Deficit
MTO /
Rule
Adjustment
path to MTO
Expenditure
benchmark
National
Expenditure
Ceilings
National
Budgetary
Rule
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
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
per cent
Unemployment Rate and NAWRU
actual
NAWRU
%
18
4
16
3
14
2
12
1
10
0
8
-1
6
-2
NAWRU*
Actual Unemployment
Migration (inverse) as % of total labour force (RHS)
4
2
-3
-4
0
-5
1965
1969
1973
1977
1981
Sources: AMECO; Eurostat and IFAC internal calulations.
* EU Commission estimates as of Winter 2014 forecasts.
1985
1989
1993
1997
2001
2005
2009
2013
% of total labour force
MIGRATION, UNEMPLOYMENT AND NAWRU ESTIMATES
70.0
68.0
66.0
64.0
62.0
60.0
58.0
56.0
54.0
52.0
50.0
2017
2013
2009
2005
2001
1997
1993
1989
1985
actual
smoothed
1981
• Forecasts extended
using simple AR
model
• Data for full period
then filtered using
HP filter
per cent
Labour Force Participation
Procyclicality
20.0
15.0
10.0
5.0
0.0
-5.0
-10.0
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
16
14
%
12
All
10
1yr+
8
2yr+
6
4
2
0
4yr+
Long-term unemployment by previous sector of employment
Other NACE activities (R to U)
Human health and social work activities (Q)
Education (P)
Public administration and defence, compulsory social…
None
Administrative and support service activities (N)
Professional, scientific and technical activities (M)
Information and communication (J)
Accommodation and food service activities (I)
Transportation and storage (H)
Wholesale and retail trade, repair of motor vehicles…
Construction (F)
Industry (B to E)
Agriculture, forestry and fishing (A)
0
5
10
15
20
25
30
Mismatch?
Arts, entertainment and recreation; other service…
Human health and social work activities
Education
Public administration and defence; compulsory…
Administrative and support service activities
Professional, scientific and technical activities
Real estate activities
Financial and insurance activities
Information and communication
Accommodation and food service activities
Transportation and storage
Wholesale and retail trade; repair of motor…
Construction
Industry (except construction)
Total
0
2014Q2
2009Q1
0.5
1
1.5
2
2.5
3
2014
2013
2012
Males
2011
2010
2009
2008
Total
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
% of 15-16 population
Employment rate + productivity?
90.0
80.0
70.0
60.0
50.0
Females
40.0
30.0
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.
% of working age population
Dependency Ratios
50.0%
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Old age dependency ratio (70+)
Total dependency ratio
Youth dependency ratio (0-14)
Population structure
Age and Gender Distribution
2020
Age and Gender Distribution
2010
Females
80-84
80-84
70-74
70-74
60-64
60-64
Age Cohort
Age Cohort
Males
50-54
40-44
30-34
50-54
40-44
30-34
20-24
20-24
10-14
10-14
0-4
0-4
-10.0
-5.0
0.0
%
5.0
10.0
Females
Males
-10.0
-5.0
0.0
%
5.0
10.0
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.