Quarterly Economic Observer - Winter 2017 - "A Low Skills Equillibrium in Northern Ireland"

This edition of the NERI’s Quarterly Economic Observer (QEO) outlines our latest expectations for the economic outlook in Northern Ireland and the Republic of Ireland (Section 1) and examines public finances and the issue of Skills in Northern Ireland (Section 2).

Outlook for Northern Ireland

  • Output in the Northern Ireland (NI) economy is still being impacted by significant losses in the manufacturing industry, particularly in Food, Beverage and Tobacco. Concerns surrounding the future of operations in Bombardier pose significant future challenges for the wider sector.
  •  Whilst unemployment in NI fell to an historic low of 4% in the third quarter of 2017, this is masking fundamental weaknesses in the labour market. Economic Inactivity is at is highest rate since 2010 (28.9%) and this fall in economic activity has been much more pronounced for females.
  •  Growth in wages for 2017 was outstripped by inflation resulting in a real terms decrease for most workers. Wages for part-time, male workers in private sector saw an inflation adjusted decline of over 5% and this may explain some of the increase in male economic inactivity.
  •  The Budget for NI passed by parliament in Westminster last month saw an increase in core spending of just 2%. With inflation now running at 3%, this means most departments will see a real terms cut in spending. Excluding spending on redundancies, Education spending will fall by 1% even before inflation is taken into account.
  •  The issue of the border between NI and the Republic of Ireland (ROI) has taken centre stage in the current round of Brexit negotiations. Without a change in policy from the UK government regarding the Single Market and particularly the Customs Union, it would seem highly likely that there will be a ‘hard’ border of some kind on the Island of Ireland.

 A Low Skills Equilibrium in Northern Ireland

  • A lack of skilled workers has long been considered one of the central weaknesses of the NI economy. The proportion of people with no qualifications in NI is almost double that of Great Britain.
  •  However, much of the debate on skills focuses solely on a lack of supply. We propose here that a lack of demand for skills is of equal concern. Furthermore, it is argued that the underperformance in the supply of skills is likely driven by a lack of demand for skills and vice versa.
  •  A situation of mutual causality between the supply and demand for skills has been referred to in previous research as a Low Skills Equilibrium (LSE). It describes a situation where a country or region is trapped in a cycle of low skilled work leading to low value-added production and consequently low wages.
  •  Despite NI’s comparatively low skills base, there appears to be no mismatch between the skills of the workforce and those required by employers. In fact, NI has the lowest rate of skills mismatch of any OECD economy.
  •  Workers in NI are also found to have less ambition toward greater skills acquisition and this is matched by the attitude of employers. Firms in NI are significantly less likely to suffer skills shortages and are more likely to have under-utilised staff due to a lack of opportunities for progression.
  •  The policy implications of a LSE are significant. Boosting the supply of skills in a LSE will be pointless if it is not matched by the level of action in terms of demand.
  •  Solving a LSE requires coordination within the economy to match the efforts of both firms and workers. The UK economy, including NI, lacks the institutional capability for this type of intervention at the macro level.
  •  Policy should aim to build on existing examples of coordination at the micro-level, such as collective agreements within firms where skills investment is planned by both the employer and employees. The success of such arrangements should be used as a framework to broaden upskilling to other sectors and industries in the economy.

Economic Outlook for the Republic of Ireland

  • Headline output in the Republic of Ireland (ROI) continues to be distorted by tax planning and other activities in the large multinational sector, but broader indicators such as employment growth show that the economy is undergoing a cyclical upswing.
  •  Growth in personal consumption has been slower this year than in 2015 and 2016 and was up 1.7% on an annual basis in the first half of 2017.
  •  Average weekly earnings only increased by 1.7% on an annual basis in the third quarter. While CPI inflation in ROI has remained significantly lower than NI, averaging 0.3% over the past 12 months, the rate of inflation in rents nationally is currently running at 11.2%.
  •  We project that GDP in ROI will grow by 4.5% this year, falling to 3.4% next year and 3.1% by 2019. We also project that the rate of unemployment will continue to fall, albeit at a much slower pace, reaching 5.5% by 2019.
Share this page: