Labor Market Success and Labor
Market Reform: Lessons from
Ireland and New Zealand
The labor market experience of Ireland in the 1990s was entirely exceptional. Employment grew at 3.9% per year. Although the working population grew rapidly (boosted at the end of the period by returning emigrants), the employed share of the working age population (the employment rate) still rose by more than 10%. This was the sharpest increase among OECD countries, which on average recorded little change. Irish unemployment, which had been the second highest in the OECD as late as 1993 (15.6%), had fallen to 4.2% in 2000, among the very lowest in OECD (see figure 6.1).1
New Zealand's employment performance in the 1990s was less spectacular. Employment grew at 1.8% per year, and this pushed the employment rate up by 3%. Unemployment fell over the 1990s by around one-quarter to reach 6.1%, somewhat below the OECD average.
What can be learned from comparing these two small countries? The remarkable turnaround in the Irish economy occurred under a series of national wage agreements, apparently flying in the face of the general move to labor market deregulation. By contrast, the mediocre performance in New Zealand followed perhaps the most thoroughgoing deregulation of the labor market of any OECD country. Yet, according to the OECD, structural unemployment, which abstracts from temporary cyclical factors (also known as the NAIRU), fell only by about 1.5% in the 1990s in New Zealand, while the fall in the Irish NAIRU was put at 7.5% points,2 much the biggest decline of any country.
The contrasting experiences of these two small countries appears to challenge the orthodox free market view that labor market deregulation is