The relationship between Ireland’s reported GDP and employment has been a puzzle of late. Output in the economy barely grew last year yet employment soared and this year has seen GDP growth pick up but employment effectively stagnate; growth-less jobs has given way to jobless growth. The unemployment rate is still falling, it has to be said, but the explanation for that is more to do with a decline in the labour force rather than any strength in labour demand. Average pay is also declining and so the picture painted by the recent labour market data is certainly at odds with the recovery narrative currently holding sway.
The main source of information on Irish employment is the Quarterly National Household Survey (QNHS), which means that sampling errors are always present. That aside, the data shows that employment bottomed in the third quarter of 2012, having fallen by a seasonally adjusted 327k (or 15%) and then rose sharply in 2013, with the annual increase in the final quarter at 61k or over 3%. Not all industries participated and agriculture saw by far the biggest increase in employment, but on the face of it the pace of job creation was extraordinary, and one usually associated with a booming economy. Yet the recorded GDP data, which measures the output of the economy, initially showed a fall in 2013, and although subsequent revisions have been positive, the latest vintage still has real GDP growth last year of only 0.2%.Nonethelss the strength of job creation precipitated a substantial fall in the unemployment rate, to 12.2% at end 2013 from 14.2% a year earlier, despite a rise in the participation rate. The implied tightening of the labour market was not evident in terms of pay, however, as average weekly earnings fell by 0.7% last year.
The data revisions to the national accounts had left exports stronger than previously thought and a positive contribution from external trade was the main driver of the 2.7% rise in Irish GDP reported for the first quarter this year, offsetting another fall in domestic demand. The data left the annual growth rate in q1 at 4.1% and, as we expected, has prompted a substantial upward revision to the consensus growth projection for 2014 as a whole, with many private sector forecasts now well over 3%. Many analysts are also anticipating a pick up in personal consumption, in part predicated on a strong employment figure, but the latest QNHS data, for q2, is very disappointing in terms of job creation; employment rose by 4.3k on a seasonally adjusted basis in the quarter bringing the increase in employment in the first half of the year to just 5.5k. Coverage of the figures tended to emphasise the annual increase in employment of 37k but the quarterly flow implies that the annual rise will slow sharply by the end of the year .
The unemployment rate fell further in the quarter, to an average 11.5%, despite the weak employment figures, reflecting a fall in the labour force and a decline in the participation rate. The decline in the latter was particularly acute for those over 16 and under 24, with more staying on at school or entering third-level. Emigration is a factor too, although the net figure fell to 21k in the year to April 2014, with an increased inflow of 61k partially offsetting a reduced outflow of 82k.
The surprisingly weak employment figures should also be set against the data on average earnings, showing an annual fall of 1.1% in the second quarter, which again would not indicate a tightening labour market overall, although some industries did see strong annual pay growth including construction (6%), the hospitality sector (5.3%) and manufacturing (4.2%). Some have pointed to the strength of income tax receipts as being inconsistent with the pay and jobs data, which is worth noting, although it should be remembered that the 2014 Budget did include measures to boost income tax by over €200mn as well as strong carryover effects from 2013.
As is often the case with Irish data we are left with a confusing picture- is the economy growing very strongly, as indicated by the GDP figures, or is it much weaker as implied by the employment figures?. The latter does seem to suggest that domestic demand, and particularly the domestic service economy, where most jobs are located, remains in the doldrums. This does not preclude 3.5% GDP growth but it does mean that growth will again be driven by the multinantional export sector, which is not labour intensive.