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Economy Watch: It's time we learned about the issue of economic inactivity

Economy Watch by Paul MacFlynn, senior economist, Nevin Economic Research Institute


Policy-makers need to focus on the standard of the jobs being created

Policy-makers need to focus on the standard of the jobs being created

Policy-makers need to focus on the standard of the jobs being created

Unemployment in Northern Ireland reached a record low this month when the seasonally adjusted rate fell to 3.1% in the first quarter of 2018.

It is hard to avoid seeing this statistic as anything but good news. However, it is well known at this stage that the rate of unemployment in Northern Ireland is flattered by an elevated rate of economic inactivity which is likely concealing the true scale of the problem.

This happens every month when labour market statistics are released.

People cheer the latest drop in unemployment until they turn their gaze to the next column in the release.

The absence of a devolved government means that at least we are spared the spurious press release from a government department attempting to claim credit for something which may not in fact be very good news.

Even during more upbeat economic period before the crash in 2008, there was still a sizeable gap of 5-6% in the rate of economic inactivity between Northern Ireland and the rest of the UK.

It is one of the most oft cited weaknesses in the NI economy, yet we actually know remarkably little about it.

Economic inactivity means that a person does not have a job and is not actively looking for one. Students, retirees and parents delivering childcare all fall into this category but so too do the long-term sick

A lot of research has tried to examine why there is such large and persistent gap between Northern Ireland and the rest of the UK.

The legacy of conflict obviously plays a role, but there is no consensus on the scale or scope of that effect.

Whilst it is important that we find out why there is such a gap in the overall level of economic inactivity, it is also important to look at the short-term trends. Northern Ireland's economic inactivity may be persistent but it is also volatile.

The rate of economic inactivity was 26.3% at the start of 2017 and reached a high of 29% in October. That's a significant increase and by the first quarter of this year, the rate had already dropped back to 28%.

Sometimes swings in economic inactivity are matched by opposing swings in unemployment. If a person who was unemployed stops looking for a job, they are then reclassified as economically inactive. However, this isn't always the case. Sometimes, quite worryingly, people move from employment straight into economic inactivity.

In reality we have very little information about the people who are classified as economically inactive.

We know what their status is when we count them, but we don't have nearly enough information about how they got there.

This is quite important from a policy point of view. If a person classified as economically inactive was previously unemployed, policymakers would be forgiven for thinking that the problem is a lack of jobs.

However, this may not be the case for a person who moves from employment straight into economic inactivity.

The root of this problem may lie in other trends in the wider labour market, and a quick scan of other indicators points to part of our problem. The most recent increase in economic inactivity has been driven by males. The rate has increased by almost 5%, from 19% in 2016 to 24% in the last quarter.

Wages are experiencing a slow recovery in Northern Ireland, but this positive trend has not been experienced equally. There was a 2.6% fall in wages for male part-time workers in the private sector, which amounts to a 5.1% decline when adjusted for inflation.

Much of the increase in male employment during the recovery was driven by part-time jobs.

What we could be seeing here then is a lot of men in part-time, low-paid employment dropping out of the workforce because it is simply no longer economically viable for them to remain at work. In this sense, our problem may not be the quantity of jobs available in the economy, but the quality of jobs.

This is why focusing on simple statistics like the unemployment rate can be so dangerous. Northern Ireland does have a jobs crisis, but it won't show up in quarterly labour market statistics. Policy-makers need to focus on the type of employment we are creating and what kind of economy that it creates.

The last Programme for Government contained a commitment to create a Good Jobs Index. This would begin to re-focus policy toward the real weaknesses in Northern Ireland's economy.

In next week's Economy Watch, we hear from Ulster Bank chief economist Richard Ramsey

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