29/8/2013: Some positives v negatives from QNHS data: Q2 2013

Latest QNHS figures from Ireland are encouraging. Actually, given much of the tough news on the front of employment and jobs creation prior, these are heart warming. Here are the headlines:

Employment:

• "There was an annual increase in employment of 1.8% or 33,800 in the year to the second quarter of 2013, bringing total employment to 1,869,900. This compares with an annual increase in employment of 1.1% in the previous quarter and a decrease of 1.3% in the year to Q2 2012." This is good. Employment is up against adverse demographic effects, which is good, but it is also up due to superficial effects of reclassifications of some categories (see warning below).
• Even better news: "Full-time employment increased by 21,600 or 1.5% in the year to Q2 2013 while part-time employment increased by 12,100 or 2.8% over the year." So levels of increase in full-time employment are outstripping increases in part-time employment, implying that average jobs pool quality is not declining anymore.
• This marks third consecutive quarter of q/q increases in employment: "On a seasonally adjusted basis, employment increased by 9,600 (+0.5%) in the quarter." There was a seasonally adjusted increase in employment of 9,000 (+0.5%) in Q1 2013 and 12,100 (+0.7%) in Q4 2012.
• Employment increases and decreases composition are not sending a good signal, with higher value-added sub-categories of employment up: "Employment fell in five of the fourteen economic sectors over the year... The greatest rates of decline were recorded in the Administration and support service activities(-7.9% or -5,000), Transportation and storage (-5.4% or -4,900) and Public administration and defence; compulsory social security (-4.5% or -4,500) sectors. The largest rates of increase were recorded in the Agriculture, forestry and fishing (+18.7% or 16,300) and the Accommodation and food service activities(+8.0% or 9,600) sectors. 
• Here is a warning shot on the above figures: "In the case of the Agriculture, forestry and fishing sector it can be noted that estimates of employment in this sector have shown to be sensitive to sample changes over time." So, wait... +16,300 'new' jobs in Agriculture etc are really old jobs reclassified... or at least a large share of these are... Oops.. Note that this exactly matches decrease in the 'Not in the labour force' category (-16,300 y/y) and this knocks out quite a bit of wind out of the 'jobs creation' figures sails...

Unemployment:

• "The seasonally adjusted unemployment rate decreased from 13.8% to 13.7% over the quarter while the number of persons unemployed fell marginally by 500 persons, again on a seasonally adjusted basis." This is news in so far it is 'official' QNHS reading, but we knew 13.7% figure back in May when we had the standardised rate of unemployment estimate from Live Register.
• "Unemployment decreased by 22,200 (-6.9%) in the year to Q2 2013 bringing the total number of persons unemployed to 300,700. This is the fourth quarter in succession where unemployment has declined on an annual basis." Which is good news, indeed, except, wait... what about the 16,300 'new' jobs in Agriculture, Forestry & Fishing flagged above? Marginal decline of just 500 in terms of q/q seasonally-adjusted unemployment is a poor reading, to be honest. Better than an increase, but still, very weak. This weakness suggests that the bulk of 22,200 declines in unemployment rosters is due to exits and reclassifications of workers, not due to jobs creation.
• "The long-term unemployment rate decreased from 9.2% to 8.1% over the year to Q2 2013. Long-term unemployment accounted for 58.2% of total unemployment in Q2 2013 compared with 61.8% a year earlier and 56.1% in the second quarter of 2011." What we do not know here is whether this decrease was due to exits from benefits or entries into jobs or move to state-run training programmes. I will do analysis on these later, so stay tuned.

Labour force participation:

• Good news: "The total number of persons in the labour force in the second quarter of 2013 was 2,170,700, representing an increase of 11,500 (+0.5%) over the year. This compares with an annual labour force decrease of 19,600 (-0.9%) in Q2 2012." 
• The above is a good bit of news and it is made even better when we consider that increases in labour force were driven by increased participation rather than by demographic effects. In Q2 2013 there was a negative demographic effect cutting -16,300 from the overall labour force. This was more than offset by "a positive participation effect of 27,800 on the size of the labour force over the year.
• There was "an increase in the overall participation rate from 60.1% to 60.5% over the year to Q2 2013." Which is excellent news.
• "The number of persons not in the labour force in Q2 2013 was 1,415,600, a decrease of 16,300 (-1.1%) over the year." This seems to be related to reclassifications into Agriculture, etc. sector.

To summarise:

We have some positive news above, but overall, numbers remain obscured by reclassifications, changes in composition and lack of clarity on flows in- and out- of unemployment. 

Analysis of broader measures of unemployment, more indicative of underlying quality and nature of changes in the aggregate figures, is to follow, so stay tuned.

15/4/2013: Bonus Culture: A model of social efficiencies in the presence of bonuses

The global financial crisis has exposed the absurd effects of short-termism when it comes to bonuses on long-term sustainability and efficiency of enterprises. However, the idea that bonuses can be effective in creating a compensation wedge over relatively standardised salary scales to reward performance and/or human capital (on the supply side of labour) and to provide competitive advantage to firms in attracting human capital (on the demand side of labour) is not necessarily out of touch with reality in many other sectors and occupations. Still, some worrying lessons that we should learn about the distortions introduced by bonuses from the crisis do apply to other sectors as well.

An interesting paper, albeit purely theoretical, titled "Bonus Culture: Competitive Pay, Screening, and Multitasking" by Roland Bénabou and Jean Tirole (NBER Working Paper No. 18936, April 2013) looked at "the impact of labor market competition and skill-biased technical change on the structure of compensation."

The authors found that "Competition for the most talented workers leads to an escalating reliance on performance pay and other high-powered incentives, thereby shifting effort away from less easily contractible tasks such as long-term investments, risk management and within-firm cooperation. Under perfect competition, the resulting efficiency loss can be larger than that imposed by a single firm or principal, who distorts incentives downward in order to extract rents. More generally, as declining market frictions lead employers to compete more aggressively, the monopsonistic under-incentivization of low-skill agents first decreases, then gives way to a growing over-incentivization of high-skill ones. Aggregate welfare is thus hill-shaped with respect to the competitiveness of the labor market, while inequality tends to rise monotonically. Bonus caps and income taxes can help restore balance in agents' incentives and behavior, but may generate their own set of distortions."

Furthermore, "The extent to which [such a correction via bonus caps and income taxes] is achievable depends on how well the government or regulator is able to distinguish the incentive versus fixed parts of compensation packages, as well as on the distortions that may arise as firms try to blur that line or resort to even less efficient screening devices."

One issue with the study is that the model does not allow for heterogeneity between agents and between various sectors of economy. The authors acknowledge this much by stating that "…task unobservability may be less of a concern for some (e.g., private-equity partnerships) and more for others (large banks), but if they compete for talent the high-powered incentives efficiently offered in the former may spread to the latter, and do damage there. Heterogeneity also raises the question of the self-selection of agents into professions and their matching with firms or sectors, e.g., between finance and science or engineering."

Other shortcoming, also mentioned by the authors in their 'what can be done next' discussion is that in some  "settings in which high-skill workers become more valuable as firms compete harder for customers, for instance because the latter become more sensitive to quality."