CONOM L E IC A A N N IO D T A S O N C I E A H L T FORUM Fóram Náisiúnta Eacnamaioch agus Sóisialach Alleviating Labour Shortages Forum Report No. 19 November 2000 PUBLISHED BY THE NATIONAL ECONOMIC AND SOCIAL FORUM Copies of this Report may be obtained from the: GOVERNMENT PUBLICATIONS SALES OFFICE Sun Alliance House, Molesworth Street, Dublin 2. or THE NATIONAL ECONOMIC AND SOCIAL FORUM Frederick House, 19 South Frederick Street, Dublin 2. Price: IR£5.00 e6.35 (PN 9208) ISBN 1-899276-23-8 Contents Page Foreword 5 Section I Introduction and Overview 9 Section II Labour Market Assessment 23 Section III Employment and Non-Employment 39 Section IV The Participation Challenge 51 Section V A Comprehensive Welfare to Work Strategy 65 Section VI Individual orJoint Taxation? 79 Section VII Women Returning to the Labour Market 93 Section VIII Immigration Policy 103 Annex I References 119 Annex II Project TeamÕs Terms of Reference 119 Terms of Reference and Constitution of the Forum 123 Membership of the Forum 124 Forum Publications 126 3 Foreword Since 1994, Ireland has experienced an unprecedented growth in employment and as a corollary, a dramatic fall in unemployment. This success has, however, brought new labour market challenges as labour and skill shortages and associated recruitment difficulties have emerged across the economy. It is against this background that, in December of last year, the Forum established a Project Team to prepare a Report on Labour Shortages. A draft of this Report was considered by the Forum at its Plenary Session in Dublin on October 10th last. At this meeting, members also heard a keynote address on a range of policy issues from the T‡naiste and Minister for Enterprise, Trade and Employment, Ms. Mary Harney T.D. Subject to a number of comments, which are now incorporated in the text, this Plenary fully endorsed the Report. Labour market policies can help address recruitment difficulties in a number of ways including developing workforce skills, promoting more efficient labour market matching and supporting the expansion of the labour force. While a comprehensive policy response requires action in all these areas, this Report focuses on policies to facilitate the expansion of the workforce. Overall, the Report attempts to do two things. First, in Sections II-IV, it places the issue of labour shortages in perspective. It discusses the nature and extent of the problem and examines the potential for mobilising additional labour supply from domestic sources. It then sets out a broad policy agenda to ensure that effective opportunities for labour market participation are available to all. Second, in Sections V-VIII, the Report discusses specific policies that can help alleviate labour shortages. It considers policy in four areas: welfare to work, taxation, supports for women returners and immigration policy. Section I provides an overview of the Report as a whole and includes a summary of the specific recommendations made. We hope that this Report will be taken into account by all relevant interests and assist the development of more effective policies to manage our new found prosperity in as efficient and socially just way as possible. 5 Section I Introduction and Overview Introduction and Overview 1.1 Since 1994, Ireland has experienced an unprecedented expansion in employment that has brought widespread benefits. As the labour market has tightened, unemployment has fallen dramatically and participation has increased. As a result, living standards have risen and consistent poverty has been alleviated. 1.2 This success, however, has brought new labour market challenges as labour and skill shortages and associated recruitment difficulties have emerged across the economy. While rising wage rates can be expected to bring labour supply and demand into equilibrium over time, labour supply policies can help address recruitment difficulties by developing workforce skills, promoting more efficient labour market matching and supporting the expansion of the labour force. A comprehensive policy response requires action in all three areas. The focus of this Report is on the third of these, namely policies to facilitate the expansion of the workforce. Labour Shortages in Perspective 1.3 The two key factors determining the labour supply challenge over the medium-term are the performance of the economy and the evolution of participation rates. Without updated medium-term forecasts for growth and participation, it is not possible to quantify overall labour requirements. However, comparing different scenarios helps to identify the relevant policy issues (Section II). 1.4 Scenario 1: The ESRI Medium-Term Review Central Forecast sees the economy growing at 5.1% per annum on average in the 2000 Ð2005 period and employment growing at 2.1% per annum. In such a scenario, employment would increase by 176,000 and the overall participation rate would have to increase from 58.9% today to 61% by 2005 to match forecast employment expansion. In this scenario, modest increases in participation rates would mean that no significant increase in immigration would be necessary to meet labour supply requirements. 1.5 Scenario 2: Higher growth rates would imply a much greater challenge. If 9 Forum Report No. 19 - Alleviating Labour Shortages annual growth were one per cent higher on average than in the above scenario, employment would grow by 268,000 and participation would have to increase to 63.8% by 2005 to match employment growth. Failing this, immigration would have to increase. However, there is considerable uncertainty about the feasibility and even the desirability of such a higher growth scenario. Expanding the Workforce 1.6 The relative emphasis to be given to immigration or participation policies is an important question in its own right. Immigration is an important mechanism for meeting specific skill shortages. However, it places additional demands on infrastructure including housing. In the present context of supply constraints, this exacerbates existing problems in these areas. This suggests some caution about relying on immigration to expand labour supply in aggregate terms. Our analysis of participation in the Irish labour market shows that considerable potential remains for mobilising domestic labour supply (Section III). This is the central theme of our Report. 1.7 We identify four key challenges to employment policy (Section IV). These are: ¥ The labour market situation of the least skilled; ¥ Supporting older people in the labour market; ¥ Addressing barriers to womenÕs employment; and, ¥ The right to work of people with disabilities. 1.8 The labour market situation of the least skilled: There are two complementary ways to address this challenge. First, there are measures to address education and skill deficits both before young people enter the labour market and among adults. A particular challenge is to ensure that priority is given to addressing the education and training needs of the least skilled, regardless of their current employment or social welfare status. In order to do this the focus of training policy in the current labour market context must be clarified.The second complementary approach is to Ômake work payÕ at the lower end of the labour market through the development of: 10 Section I - Introduction and Overview ¥ The minimum wage; ¥ Targeted tax relief, especially through increasing basic tax credits; ¥ In-work benefits; and, ¥ Other welfare to work policies. 1.9 Supporting older people in the labour market: The challenge here is to restructure retirement and early retirement incentives on the one hand and ensure opportunities for remaining in employment on the other. Many of the rules incorporated in social security and tax systems present an all or nothing choice to older workers. Reform should, therefore, focus on measures that allow for a more gradual withdrawal from the labour market according to individualsÕ preferences and abilities. Specific Irish research is required to clarify the relative roles of incentives to withdraw versus effective exclusion from the labour market as factors determining the fall in participation of older workers. As a priority, labour market policy must address both the prevention of long-term unemployment of older workers and the re-integration of older men and women into the labour market. 1.10 Addressing barriers to womenÕs employment: The barriers to employment facing women are broadly of two types. First, there are the difficulties faced by parents of young children in particular in combining work and family responsibilities. This issue can be addressed through the provision of time, money and services. Time flexibility is a crucial element in enabling parents, men and women, to reconcile employment and childcare responsibilities. Currently, some £250 million is committed to childcare supply measures over the period of the National Development Plan (2000- 2006). However, as we are starting from a very low base of provision, ongoing substantial investment will be required. Support for childcare costs should be introduced as a priority. It has not been possible to reach a consensus on the best way forward on this issue, which, in any case, is being addressed in the context of the Programme for Prosperity and Fairness (PPF). Second, women face additional obstacles when seeking to return to work after a period of absence caring for children. Both the tax and social welfare systems incorporate specific disincentives to women returning to work. In addition, being out of employment for relatively long periods of time poses additional obstacles Ð in terms of familiarity with the current labour market, skills that have become obsolete and even loss of confidence 11 Forum Report No. 19 - Alleviating Labour Shortages in oneÕs ability to make the transition back into work. 1.11 The right to work of people with disabilities: People with disabilities constitute a relatively large proportion of the working age population and employment among this group is significantly lower than for the population as a whole.