In early 2003, I joined the Australian Treasury where I was immediately introduced to the Department’s “Three P’s” framework, which effectively argued that Australia needed to: 1) boost productivity; 2) raise workforce participation; and 3) increase the population via skilled migration, if the nation was to continue to enjoy rising living standards.
Life is all about trade-offs. Working longer hours (increasing participation) means that less time is available for other pursuits, such as relaxing or meeting-up with friends. So while working more will, other things equal, raise incomes and GDP, it also takes away from the other pleasures in life, placing a question mark over whether living standards are actually improved.
Population growth’s impact on living standards is even more spurious. While it certainly does raise headline GDP (more inputs equals more outputs), there are significant doubts over whether it raises per capita GDP, while also placing greater pressure on the environment, pre-existing infrastructure and housing, and dilutes Australia’s fixed endowment of mineral resources (see here for a detailed run-down of the issues).
This leaves productivity growth – effectively producing more from less – as the only real driver of rising living standards over the longer-term.
In today’s speech to the American Chamber of Commerce business luncheon, RBA Governor Glenn Stevens, made similar comments, arguing that Australia needs to boost productivity growth to counter ageing:
More people will be moving into retirement, and fewer people entering the workforce, over the years ahead.
…cyclical things aside, the more likely problem in the medium-term future won’t be one of not enough jobs, but instead, not enough workers. At present the number of new entrants to the labour force after finishing education each year exceeds the number retiring. Ten years from now those numbers could be roughly equal, absent a further rise in labour participation in the older cohorts. The question will be less ‘where will the jobs come from?’ and more ‘where will the workers come from?’ It’s true that migration adds to the workforce as well, though migration also adds to the number of people not working and retiring.
So demographic trends point in the direction of a smaller proportion of the population working, and a larger proportion needing support in their later years, even as other demands on the public finances for the provision of social goods increase.
That looks like a pretty uncomfortable combination of trends. How do we reconcile them?
The answer – the only answer – is growth. To some extent we will, hopefully, be able to lessen the problem through higher labour participation, for longer. But most of all we will need higher productivity of those working. That means making the system as flexible as possible and as encouraging as possible to innovation.
Exactly. Calls for Australia to increase its immigration and/or birth rates in order to mitigate the impacts of an ageing population are misguided. The impacts from migration are only temporary, since migrants themselves age – a fact also confirmed by the Productivity Commission (see here).
This leaves productivity growth as the only sustainable, long-term option.
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