The Irish labour market is undergoing a severe adjustment following the sharp fall in output, which has been concentrated on labour-intensive sectors. This has led to a large reduction in employment and high levels of unemployment, despite some outward migration. The labour market in Ireland is flexible in terms of regulation and widespread evidence suggests some reduction in nominal wages is already taking place. But, there is a serious risk that joblessness in the short run will translate into a permanently higher level of unemployment due to the combination of relatively high unemployment benefits for low-skilled workers and, more importantly, weak activation measures. Although some measures have been taken in response to the rise in unemployment, greater encouragement and support should be provided to help the unemployed get back into work and conditionality should be stricter. For the longer run, female participation would be facilitated by removing obstacles in the tax-benefit system; lone parents would be helped by greater support and a stronger requirement to work; and more systematic efforts are required to ensure that disability is not a pathway to inactivity.