Even in a slowing economy, the need for foreign labour, although reduced, will continue, writes Paul Tansey.

ONE IN every six members of the Republic's labour force is now a foreign worker.

In the final quarter of 2007, non-Irish nationals accounted for 355,000 of the 2.24 million members of the labour force, according to the Quarterly National Household Survey.

Moreover, foreign workers have been joining the labour force here at a faster pace than indigenous workers in recent times. It increased by 77,500 people between the fourth quarters of 2006 and 2007 and of these, 49,700, or 64 per cent, were foreign workers.

The current economic slowdown will reduce the demand for labour and, by derivation, the demand for foreign labour. This is likely to be reflected in a substantially reduced net immigrant inflow over the next couple of years.

However, when Irish economic growth returns to trend rates, strong demand for foreign labour will resurface.

The Central Statistics Office (CSO) points out, in its Population and Labour Force Projections to 2041 published last week, that in the absence of any net immigration, the growth in the Irish labour force over the next decade or so would be extremely subdued.

With zero net immigration, the CSO projects that the labour force would grow by a very modest 13,000 annually in the years to 2021. As a result, the labour force in 2021 would be just 192,000, or 9 per cent, higher than 15 years earlier, as shown in Table 1.

Continuing strong net migration inflows would change the labour market picture entirely. Net immigration averaged 72,000 annually in the inter-census period 2002-2006.

Assuming net inward migration of 50,000 people annually in the years to 2021, the labour force would expand by three-quarters of a million people between 2006 and 2021, according to the CSO projections. This would see the labour force increasing from 2.12 million in 2006 to 2.87 million by 2021, a growth rate of 35 per cent.

The sensitivity of future Irish labour force growth to migration trends can thus be demonstrated. With zero inward migration, the labour force increases by 192,000 between 2006 and 2021. With net inward migration averaging 50,000 a year, the labour force expands by 747,000 over the same time span.

Continuing strong net immigration would therefore add 555,000 extra people to the labour force in those 15 years to 2021. Thus, in the decades ahead, the pace of Irish labour force growth will be determined, in large measure, by the scale of net immigration flows.

The CSO also assesses the impact of a more moderate rate of net immigration. Assuming average net immigration of 37,000 annually in the years to 2021, the CSO projects labour force growth of almost 600,000 between 2006 and 2021.

This stands equivalent to an expansion of 28 per cent in the size of the labour force over 15 years.

So which of these three scenarios is the most likely to reflect reality over the long haul? In assessing long-run trends, two factors need to be borne in mind.

First, within an EU context, migration is largely a response to economic conditions. Thus, future inward migration will be determined by the availability of jobs and the level of real wages in Ireland relative to what is available in other accessible labour markets.

Second, in looking at the long run, it is all too easy to be blind-sided by short-term trends. Abstracting from the current slowdown, the long-run trend growth rate of the economy is about 4 per cent annually.

Assuming productivity growth of 2 per cent a year, this suggests that exploiting the economy's long-run growth potential would require labour force growth of some 2 per cent a year.

With the labour force numbering 2.24 million, this suggests a requirement for growth of some 45,000 a year, if the trend growth rate is to be maintained over the long haul.

However, in the absence of any net immigration, the CSO's projections show the labour force expanding by only 13,000 annually in the years to 2021.

In other words, on these calculations, the domestic labour market could not supply sufficient workers to support the economy's long-run growth potential.

The shortfall amounts to some 32,000 workers a year, implying a long-run requirement for total annual net immigration of some 40,000.

In these circumstances, the CSO's moderate immigration projection, M2, which projects annual average net migration inflows of some 37,000 in the years to 2021, looks the most likely candidate to reflect reality. However, the trend will not be linear; instead, it will bend with evolving economic cycles.

In the short-term, the current slowdown will cause employment to contract and unemployment to rise, obviating the need for any aggregate labour force expansion. With a loosening labour market, net immigration can be expected to fall fairly steeply over the next two years or so.

However, as the economy emerges from the slowdown and domestic unemployment again declines, the need for substantial net inflows of foreign workers will again become apparent.