Stimulating domestic demand is central to the solution of our current problems, writes EUNAN KING.

THE OPENING lines of the official statement describing the situation in the labour market in the last quarter of 2008 are stark.

Employment fell by almost 87,000 year-on-year, a decline of over 4 per cent. This represents a dramatic deterioration from the 1.2 per cent annual decline in the third quarter and the growth of 3.2 per cent in the same period in 2007. The fourth quarter of 2008 saw the largest annual decline in employment recorded since 1975.

The employment rate among people aged 15-64 fell from 69 per cent a year earlier to 65.8 per cent, a level last seen in 2004.

Of the 87,000 decline, reduced activity in housebuilding accounted for 52,000. An increase of about 7,000 in other construction employment reduced the net fall in the sector to 45,000. The balance of the decline was accounted for in roughly equal proportions by manufacturing, retail, hotels and restaurants and financial and business services. The shock to the economy was manifested first in housebuilding and this would now appear to be translating in very broad terms to a job lost elsewhere in the economy for every one lost in construction.

Unemployment increased by almost 70,000 year-on-year to more than 170,000. The broad measure of available labour supply as a percentage of the labour force rose from 7.3 per cent at the end of 2007 to 10.9 per cent. The number in the labour force, at over 2.2 million, was down almost 1 per cent on a year earlier. This is the first annual decline in the labour force since the series began 10 years ago. The average rate of growth in that period was 3 per cent per annum.

The rate of increase in numbers of working age had been a prime driver of this growth. It averaged 64,000 per annum over the past decade but in the year to the fourth quarter of 2008 slowed to only 17,000. The main factor in the slowdown has been a deceleration in the rate of immigration.

Given that the construction, retail and hotels and catering sectors lost the bulk of the jobs, it is unsurprising that employment of foreign nationals fell by 5.6 per cent compared to the 3.8 per cent decline in employment of Irish nationals. The economy is held to be heavily dependent on exporting, an activity central to the multinational sector. Between 1998 and 2007, total employment rose by almost 600,000 but employment in industry fell by more than 15,000.

Most of the multinationals are counted within the industry sector and would account for less than 100,000 of the 278,000 in that sector. Even if we add multinational activity in the service sector, the total amounts to about 150,000. The main contribution during the boom years to the growth in employment came from the increase of almost 500,000 engaged in the service sector, of which construction added over 140,000. Services expanded as the domestic market grew, fuelled by rapid growth in numbers aged between 15 and 64.

Thus domestic demand is central to the solution of our current problems, not exporting and competitiveness. Increasing taxation rather than cutting Government expenditure threatens already weakened domestic demand.

Moreover, taxing the higher paid is likely to significantly affect domestic consumption. Estimates suggest the top 10 per cent of earners pay more than half of income tax but they are also likely to account for perhaps 40 per cent of domestic consumption.

Taxing the “rich” may be an easy populist policy but is it the most effective route to recovery?