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Nobel Economics prize winner Pissarides addresses Irish Senate on youth unemployment Back
November 8th: The special impact of youth unemployment in recessions, particularly prolonged recessions such as Ireland's, was the subject of an address to the Senate by 2010 Nobel Economics prize winner, Christopher Pissarides. The initiative was proposed by TCD economist and senator, Sean Barrett, and the special Senate session heard responses to the paper by spokespersons from all political parties in the Senate. KEN O'BRIEN, the editor of Finance Dublin, was there.
London School of Economics (LSE) Professor Pissarides also addressed the Trinity College Dublin Historical Society, which presented him with its gold medal, the second such award within a week, Nobel prize winning economist Thomas Sargent, having received the society's gold medal on Tuesday 6 November. Cyprus-born Pissarides has worked in the LSE since 1976, and has been Director of the Research Programme on Macroeconomics at the Centre for Economic Performance, at the LSE.
Christopher Pissarides

Central to the thinking that led him and his collaborators to the Nobel Prize in 2010 was the insight that all people, employees and self employed alike, view their assets in an equivalent way to employers, as human capital that is an asset that he or she sells in a labour market where job outcomes are uncertain.

Professor Pissarides was awarded the Nobel prize in economics in 2010, jointly with Peter Diamond, and Dale Mortensen for their work in developing a theory of markets with search frictions.

Describing the theory in his citation for the prize in December 2010, Professor Bertil Holmlund, Member of the Royal Swedish Academy of Sciences, Chairman of the Economics Sciences Prize Committee said: "This theory is relevant in many markets. For example, it applies to the housing market, where many households are searching for new homes at the same time as a large number of houses and flats are being offered for sale. Search theory can also be used to study how spatial frictions and transport costs affect residential patterns and business location decisions, and even how matching takes place in the marriage market. However, the most important application is in the labour market".

The research on markets with search frictions has "had a profound impact on how economists view markets in general and labour markets in particular", he added. Their detailed models of how prices and quantities are determined in markets with frictions and how frictions affect unemployment and other labour market phenomena, "have become indispensable tools for policy analysis and your work has initiated a large empirical literature".

Replying to a question from Senator Marie Moloney (Lab) about the effect of the minimum wage and its level in the Irish labour market, he compared its workings with wine, some good, too much being bad, the good aspect working to reassure young workers in particular about the fairness of job offers, particularly for first time job seekers, the bad aspect being the depressing effects of an excessively high minimum wage on the number of job vacancies that will be offered.

Senator Fidelma Healy Eames (FG) said 'we have made mistakes in education. We often educate purely for employment, rather than also educating for self-employment, which means that when people lose their jobs in a recession, they think there is no work they can do. I believe we should be educating for self-employment and entrepreneurship as well as for employment. It should not be an add-on, which is what many of our educational institutions meddle in, for example, as part of the transition year programme'.

Introducing Prof Pissarides, the leader of the House, Senator Maurice Cummins. (FG) reflected on the difference between economists and politicians, quoting the Amercian economist Thomas Sowell, who said 'The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it; The first lesson of politics is to disregard the first lesson of economics'. Nevertheless, he said, 'given your distinguished record and achievements I sincerely hope that your words to the House today will not be disregarded'.

Professor Pissarides said in his Senate paper that young workers are most affected in recession. Youth unemployment is usually about 2.5 times higher than adult unemployment. That means, he said, that "if adult unemployment doubles from 5% to 10% youth unemployment goes up from 12% to a staggering 24%".

In countries like Greece and Spain half of young workers are unemployed. Ireland, Portugal and the Slovak Republic come next, with about a third of young workers out of work. "Something needs to be done about this situation to avoid a lost generation, with negative implications for economic growth and employment for many years to come".

"Young workers are at an age when they are uncertain of their skills and their future prospects in the labour market. They need to experiment to discover their true potential. They should be able to take jobs, try them out and leave them if they find they cannot make the best use of their talents. The best labour markets are the ones that enable young workers to try different jobs and settle down to the one that they can do best. A good match with their employer and the job's needs is essential if the young worker is to find job satisfaction and lead a happy professional and social life. The two usually go together and reinforce each other."

He outlined several ways in which Governments can intervene to alleviate the ill effects of frictional unemployment, including education, training in entrepreneurship, infrastructure projects, and the "many ways of subsidising jobs for young people, especially those who have been unemployed for a long time".

Replying to Prof Pissarides' address, Senator Sean Barrett (Ind) said he agreed with the emphasis on microeconomic solutions, but cautioned on the need to examine policy decisions in detail. He said that questions need to be asked as to what kind of investments should be made in education as well as the need to address issues in public expenditure allocation, such as the role of rent seeking, 'engineer dominance' in infrastrucural expenditure, a lack of project appraisal in public expenditure decisions, and, the role of quangos.

In his speech, Senator Barrett said:

'I welcome Professor Pissarides and I compliment him on winning the Nobel Prize having grown up on the island of Cyprus and then gone to the University of Essex and the London School of Economics. What he said to us about the lost generation will certainly stop us in our tracks as we try to deal with the problem of youth unemployment throughout Europe. This is not the only honour for the professor today. The Trinity College Historical Society will present him with its gold medal this evening as an appreciation by young people for his work. That society was founded in April 1747 by Edmund Burke. His biographer stated that he found in Trinity College Dublin an amount of intellectual activity considerably greater than that which Gibbon a few years later found in Oxford. I hope the professor finds TCD provides that degree of stimulus when he goes there this evening.

'I note the professor's emphasis on dealing with unemployment on a micro level. In Ireland probably more than anywhere else we have learned that quantitative easing leads to much faster results in stock exchanges and banks, and then precipitates a property boom from which we are now trying to recover with horrendous consequences because it limits utterly the ability of the Government to tackle the issues the professor has raised so strongly with us. I agree with the emphasis on such micro approaches because the experience of QE in Ireland has probably been among the biggest disasters of any country. Given that our resources are limited, the questions that arise from the professor's presentation relate to the type of education we should have. Can he think of areas of investment in education that we should expand or areas of investment in education that we should reconsider?

'Regarding the professor's project appraisals, we had a massive problem with one of the biggest public capital programmes relative to GDP to be found anywhere. The background would be a strong tradition of engineer dominance, rent seeking by the construction industry and a lack of project appraisal resulting in projects that add more to the country's debt than to its GDP as they work out. As Senator Bacik mentioned, we had a problem with labour market quangos - one of which was spending €1 billion of EU funds in a period when unemployment was virtually non-existent at 4%.

' While I hate the term, an important consideration for us is how to get more bang for a buck in these areas. I ask the professor, developing his major points, to outline any ideas he has to help us to focus. We are seriously in debt and in an IMF rescue programme. We are trying to do, as other Senators have said, so much in terms of 90% retention rates at second level and so on but we need to use our resources very efficiently because we made so many mistakes and used up so many of our resources previously.

'The professor mentioned the European Investment Bank. Can it hone its investments to a better rate of return on projects? Do we need a central office of project evaluation? Would he require the evaluations to be published well in advance so that economists, such as he, could assess whether the projects are worthwhile. It is an economy where rent seeking and regulatory capture were features. Today's newspapers have again highlighted that we are still captured by banks that are largely exempted from the consequences of the damage they imposed on the country.

'I thank the professor for his words of wisdom, which are very important to us. We have a major problem to address. I refer to other points mentioned by Senators. In education we have a mathematics problem, which has been discussed in this House. We also have a problem with languages, also referred to today. Is that inherent in all English-speaking countries? People do not learn enough languages to trade with the BRIC countries and the wider world', he concluded.

The Senate debate also heard several contributions relating to the overall theme, as well as a discussion of the role particular industries and sectors might contribute to employment creation.

Senator David Norris (Ind) called for a human face to be put on economics, and warned against 'rigid economic theories imposed from the centre'. Echoing Prof Pissarides' encouragement of education in basic entrepreneurial skills, Senator Ivana Bacik (Lab), a graduate of LSE herself, cited the example of IKEA, a Swedish example of entrepreneurship as something to be emulated. She also said that we need to look at the idea of a European-wide youth guarantee proposal. 'Is Professor Pissarides familiar with the idea of a European youth guarantee to be funded potentially by the European Social Fund or European Structural Funds and which would guarantee young people that within four months of becoming unemployed they would be given a training place, an apprenticeship or a combined work and training placement, if not a job offer? Commitment is needed on this at European level where there is an EU average youth unemployment rate of 22%', she said.

Senator Mary White (FF), as a former entrepreneur who set up a company that now employs 250 people, urged the Government in the forthcoming Budget to embody a recognition that the 'only source of employment' was SMEs and foreign direct investment, and not the public sector.

Engaging in a debate about the appropriate sectors that could create jobs, Prof Pissarides opined that, overall, the services industry was most likely to be the source of most employment creation in advanced economies in the future.

Senator Darragh O'Brien, (FF) argued for infrastructural spending and the capital budget to be used as a form of stimulus, an argument supported by Sinn Fein Senators, Senator David Cullinane, and Senator Kathryn Reilly. They also supported, as did Prof Pissarides, various green and cleantech solutions, such as retrofitting houses, and other initiatives.
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