Capacity constraints, chapter 2 in The National Development Plan in 2023: priorities and capacity

The economy is performing exceptionally strongly at the moment, and this is reflected in the current rate of unemployment – 3.8 per cent – which is historically low in modern times. Noting limits to increased labour supply from sources such as increased participation and increased immigration, it is clear that the economy – and hence the NDP – faces severe capacity constraints.

Some studies are reviewed which sought to quantify the amount of labour needed to deliver on some of Ireland’s investment needs. For example, the Expert Group on Future Skills Needs (2021) asked how many additional construction workers would be needed to raise housing output from a level of 20,000 units in 2020 to 33,000 in 2025. Looking at ‘direct’ employees and ‘indirect’ (which is supply-chain related), they estimate that approximately 40,000 full-time equivalent employees were required to build 20,000 housing units and so an extra 26,000 would be needed to reach an output of 33,000 units. Based on this and other studies, including the analysis in the Energy chapter of this report, it is clear that an accelerated NDP will create levels of labour demand in the construction sector where supply is simply unavailable. 

We go on to ask what the effect might be of injecting additional demand into such a constrained setting. Referring back to earlier ESRI work from 2006 and from more recent simulations using macroeconomic models, it seems likely that such additional demand would lead to construction wage inflation and the drawing of labour away from other sectors. However, the models could well be underestimating the inflationary impact. With the unemployment rate at a historically low level, previous trends suggest that the relationship between the unemployment rate and the inflation rate might not be linear. Instead, inflation might accelerate as unemployment is lowered. The effect of this would be to raise the cost of delivering capital expenditure, and spillover inflationary effects are also possible. However, we should also note that in the medium term, the successful delivery of NDP projects including housing should lead to a reduction in inflationary pressures.