John FitzGerald: Economic challenge of managing success

Sometimes governments can be too successful in managing the economy for their own good. Over the hugely difficult last two years, when the pandemic dominated our lives, we have seen how the Government not only managed to mitigate the consequences of the lockdowns on personal incomes, but also insulated the economy from major damage. As a result, the economy has roared back into action very rapidly this year. However, this very success has given rise to problems which are in some ways more difficult to deal with, and the social solidarity shown in adversity is less in evidence in recovery.

There are large numbers of young people seeking accommodation in a tight and expensive market. The massive queues waiting in the airport last weekend is the latest issue. All these contribute to rising public frustration. If the Government had done a much worse job over the last two years so that nobody could afford to travel, and if heavy emigration was reducing house prices, would there be less stress today?

Last year, few predicted how early we would return to full employment and a tight labour market. But the pandemic has also brought significant changes compared to the pre-pandemic world, with many choosing a better work-life balance. Today, people on average work 32 hours a week, about 1½ fewer hours than three years ago.

To make up for fewer hours per head, the economy needs almost 5 per cent more people at work to stand still. In fact there are about 9 per cent more people at work than in early 2019, as output has also grown. The increased flexibility that has been a major legacy of the pandemic has also contributed to a big rise in female labour force participation as we return to a new normal. This has helped fill the gap left by shorter hours of work. However, the big growth in numbers at work means there are few people not already working who would like to take a job.

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Wage pressure

Every day there are new job announcements in the high-tech sectors. The public sector is also finding it harder to hire, with particular shortages of doctors, occupational therapists and homecare workers. To fill these posts, employers will have to either attract employees away from existing jobs, or recruit abroad. Over the coming year, this will add to the growing pressures on wage rates.

There were already significant inflationary pressures last winter, before the invasion of Ukraine. The slow return to normal production worldwide, combined with a surge in consumption from pent-up savings, was already adding to prices. These problems have been greatly magnified by the war in Ukraine, especially by its effects on energy prices.

Public-sector wage negotiations will take place against this backdrop of a tight labour market and exceptional inflation, putting pressure on the Government. While a deal will eventually emerge, one can be sure that it will be met with little enthusiasm from all those involved.

Labour shortages are likely to bring higher inward migration, putting further pressure on the housing market. Economic success exacerbates current housing shortages, and means we need to build more. Rising costs of building materials and a shortage of building workers means that Government investment in the housing market won’t go as far as hoped to drive up supply.

Housing deficit

A growth in the number of skilled IT professionals – who earned on average €90,000 a year before the pandemic – will create increasing demand for accommodation, and it will be competing against lower earners for limited supply. As a result, there is likely to be more unhappy people paying a major share of their income on rent, flat-sharing with strangers, back living with parents or depending on rent subsidies for often poor-quality accommodation.

The only long-term solution to the continuing pressures on housing is to build more. In turn, this needs urgent action to remove the regulatory obstacles to supply. In the short term, one measure open to the Government would be to slow the economy through substantially raising taxes. This would reduce competition for housing and also slow the growth in employment, but is unlikely to be politically palatable.

Furthermore, the Irish Fiscal Advisory Council has advised that the appropriate stance on fiscal policy is “steady as it goes”. While slamming on the brakes might reduce queues, it is not the right answer. The Government must learn to deal with the success of a surging economy, to expand the supply of critical infrastructure and to manage queues and congestion. Better to manage a boom than a slump.