Wonders will never cease. You would think that with more than 450,000 people on the live register, and the number of long-term unemployed having doubled, that it was an employer's market. Not so, despite that fact that the unemployment rate stands at 13.7%.

The recent report that more than 6,600 work permits were issued to non-EU nationals and Department of Enterprise data shows guesthouses, bars, leisure centres, restaurants, farms and pharmacies are getting permits to bring in staff from outside Ireland and Europe. Even though the government has introduced restrictions on recruiting low-paid overseas workers, this does not seem to have reduced the numbers appreciably.

Why do we have to recruit foreign workers? Is it because we Irish are lazy? Is it because we don't want to do lower-paid work? Or is it because our social-welfare system is overly generous?

The answer is most certainly the generosity of the social-welfare system, especially for long-term entitlements. This creates the phenomenon of the social welfare 'trap'.

Recently, the phone on the Isme help-line has been hopping with calls from owner/managers attempting to get their staff to come back on a five-day week as their order books begin to increase once again. They are being told by their staff that they are unwilling to go back to a full-time position. The reasons are, in the main, that it is not worth their while as they can live on their three days' wages, supplemented by the social welfare and a certain amount of 'nixer' work. We have similar calls from others who are finding it difficult to get Irish people to take on new full-time jobs, for the same reasons.

Irish people have been exiting the low-paid jobs market and being replaced by overseas workers for 10 years. The main reason for this is that social-welfare rates in Ireland are comparatively higher in European terms and lower-paid jobs are not attractive enough to entice social-welfare recipients back into the workplace. This reduced incentive to work, resulting from significant real increases in social-welfare rates, falling wages and higher taxes on labour, have heightened the need for social-welfare reform in Ireland. The difference between benefits received when unemployed and the take-home pay when in work is called the replacement rate.

In many other countries, higher benefits are provided for the initial period of unemployment and these are subject to mandatory participation in education or training. After this initial period of unemployment, benefits are reduced in order to provide a strong economic incentive for the unemployed to return to work. However, in Ireland, there is no difference between short-term and long-term replacement rates, leading to a reticence to return to full time employment.

There have been OECD and other reports critical of the lack of reduction in welfare benefits in Ireland. In particular, the OECD has pointed out that Ireland is the only country in the OECD where single-parent welfare benefits are provided until children are 18. The bottom line is that the structure of Ireland's welfare system means that there is absolutely no financial incentive for many long-term unemployed to seek full-time employment.

As Colm McCarthy pointed out so clearly in the An Bord Snip report, a head of a household who is in receipt of social-welfare benefits would need to earn a gross salary in excess of €40,000 just to match the social-welfare income. No wonder we have to recruit from afar.

Further proof of the difficulty in getting long-term unemployed back into the workplace is the abject failure, so far, of the PRSI exemption scheme, which was supposed to assist 10,000 jobs, according to the Minister for Announcements, Batt O'Keeffe. The number of jobs assisted is less than 700. Employers are glad to get the exemption but they cannot get the staff, another example of targeting the wrong constituency. Reduce the welfare payments and we might get the workers.

The usual bleeding hearts will tell us that employers are using foreign workers to keep wages down and get in­creased productivity from eager newly arrived staff, and that the way to fix the replacement rate problem is to pay higher wages. But let me remind them that it was high 'partnership' pay that got us here in the first place and is a major factor in our loss of competitiveness in the last 10 years.

The major difficulty for finance minister Brian Lenihan in the upcoming budget is to broaden the income tax base to bring into the tax net the 50% or so of lower earners who currently pay no income tax. This, on its own, will exacerbate the situation by decreasing further the incentive to work, unless the social-welfare benefits are similarly reduced.

The bottom line is that the outdated Irish labour market activation policies must be overhauled properly, instead of the largely cosmetic attempts which, up to now, have been worse than useless. The unemployment benefit system must be reformed in order to ensure a strong incentive remains for all beneficiaries to seek employment.

In summary, if the gap between after-tax take-home pay and social-welfare benefit is too narrow then there is less incentive to work. The average wage of a worker in an SME has dropped by 13.5% in the last 12 months, which has narrowed the gap further – therefore a reduction in the unemployment benefits must be introduced. A reduction of €15 in work-related schemes would save the exchequer €700m and in­crease the incentive to work. Maybe then we wouldn't need to be issuing 6,000 work permits.

Mark Fielding is chief executive of Isme