Workforce decline is all about the aged

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By Leith van Onselen

Last week, the head of the Macroeconomics Group at the Australian Treasury, David Gruen, forecast that Australia’s average per capita income growth will halve over the next decade to the lowest rate of growth experienced in 50 years.

One of the reasons behind the slower income growth is Australia’s ageing population, which is expected to reduce the proportion of workers in the economy, thereby lowering the economy’s growth potential (in addition to reducing the tax base and raising health and ageing-related expenditures).

There are already signs of population ageing impacting adversely on the labour market, with both the employment-to-population ratio and the labour force participation rate (LFPR) clearly trending down (see next chart).

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That said, there has also been ambiguity as to whether the declining labour force has been driven primarily by the ageing effect or weakening economic conditions (i.e. the “discouraged worker effect”).

The latest Federal Budget argued that around 80% of the fall in the LFPR was due to the ageing of the population, rather than discouraged workers exiting the workforce. By contrast, the AFR’s David Bassanese has recently argued that both factors are equally responsible, whereas Jack Black wrote a politically partisan post in The Australian recently arguing that the former Labor Government’s Fair Work Act was the principle cause of the rise in unemployment and lower LFPR.

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Today, Matt Cowgill has produced some excellent analysis that builds on previous work arguing that population ageing is mostly responsible for the declining LFPR, with the “discouraged worker effect” taking precedence only recently:

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This chart decomposes the fall in the participation rate into two components. The first is the decline in overall participation that has come about because of falls in participation within individual age groups. The second is the decline in the overall rate that is a consequence of the ageing of the population – a larger share of the population is now aged 65+ than was the case three years ago.

You can see in the chart that I ascribe all of the decline in participation between November 2010 and May this year to the ageing of the population. That is, if the demographic composition of the population hadn’t changed between these dates, I estimate that the participation rate in May 2013 would’ve been the same as in November 2010. But since then – over the past six months or so – most of the decline in participation has been caused by falls in the participation rate within individual age groups. The falling participation rate in recent months has been cyclical, not structural, according to my calculations.

You get a similar picture if you use the simpler approach of comparing the participation rate for everyone aged 15+ with the rate for people aged 15-64. In April/May this year, the 15-64 rate was not far off its all-time high, but it has declined since then.

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According to Cowgill, the ongoing ageing of the population makes calculations of what the unemployment rate would have been had the LFPR remained constant problematic and likely to mislead.

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Regardless, as argued previously, the ongoing ageing of the population is set to worsen Australia’s dependency ratio over the decades ahead, which will provide multi-faceted headwinds for economic growth, income growth, government finances, as well as asset values.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.