Ageing only one part of the workforce decline

Building on my earlier post about the demographic tsunami, an interesting debate has developed over the extent to which the declining Australian labour force participation rate (LFPR) and the employment-to-population ratio (see next chart) is being caused by a weakening labour market or the ageing of the population (retirement of the baby boomer generation).

Earlier this month, Jack Black wrote a politically partisan post in The Australian arguing that the former Labor Government’s Fair Work Act was the principle cause of the rise in unemployment and lower LFPR:

IN the year to August, the potential Australian workforce grew by about 335,000 people. With a long-run participation rate of 65.5 per cent, we would expect to see about 210,000 of these people joining the labour market as employed and a further 10,000 joining the labour market as unemployed and actively seeking work.

…during the past 12 months, the growth in the number of employed was half the longer run target figure, at 106,000…

[This does not include the] 400,000 discouraged workers hidden outside the labour force group since the stimulus began to run out of puff in 2010, causing the participation rate to drop from 66.4 per cent in December 2010 to its current 64.3 per cent. So the labour market is now bedevilled by increasing unemployment, underemployment and hidden unemployment…

John Howard and Peter Costello handed Labor a government which was in good shape financially and an economy which was generating as many jobs as the civilian labour market could supply…

Rudd, Gillard and Swan have handed over a government going backwards financially and an economy which generated an additional jobless figure of 90,000 persons in the year to August…

Our labour market is now increasingly unemployed, under-employed, under-utilised or discouraged, and vulnerable to domestic or external shocks.

Cheers, Tony. It’s all yours.

Today, the AFR’s David Bassanese has taken a different approach, arguing that around half of the decline in the LFPR and employment-to-population ratio is being caused by population ageing, rather than the discouraged worker effect:

If the LFPR is declining because many workers can’t find jobs and have given up trying, it suggest there’s a lot more slack in the economy than measured by the unemployment rate alone – which adds to the case for expansionary macro-policy.

But if the decline in participation is due to more Australians retiring – and/or younger people choosing to stay at school for longer – then the still low unemployment rate remains a reasonable measure of labour market slack, and economic conditions are not nearly as depressed as some claim…

So what’s the truth? By my estimates, population ageing – or especially the movement of people into the post-65 year retirement age – accounts for around one half of the decline in the headline participation rate since November 2010. It also helps explain why the headline employment-to-population ratio has declined relatively sharply.

Indeed, if we instead focus only on the population aged between 15 and 64 years, the decline in labour force participation and the employment-to-population ratio has been more modest.

That still leaves some decline in participation as reflective of weaker labour market conditions – as is completely normal during economic cycles…

The latest Federal Budget went even further than Bassanese, arguing that around 80% of the fall in the LFPR was due to the ageing of the population, rather than discouraged workers exiting the workforce:

The most significant factor weighing on participation is Australia’s ageing population, resulting in fewer potential workers as a share of the total population…

This demographic change is already having an effect, with the changing age distribution accounting for around 80 per cent of the decline in the participation rate since 2010.

In particular, the increase in those aged 65 and over as a share of the working‑age population (aged 15 and over) has accelerated in recent years, resulting in a higher proportion of workers reaching retirement age.

And Matt Cowgill has provided the below chart, supporting Treasury’s view:

The participation rate of people aged 15-64 remains near its record high – nearly all of the decline over the past couple of years is due to the ageing of the population, not due to a declining participation rate among particular age groups…

For mine, the softer labour market is being driven by a combination of the ‘retirement effect’ and the ‘discouraged worker effect’. While the fall in the LFPR and the employment-to-population ratio might be being driven predominantly by the retirement of the large baby boomer cohort – a phenomenon that will exacerbate in the decades ahead – it is also true that some proportion of the deterioration in these measures is being driven by discouraged workers leaving the workforce, at the same time as the unemployment rate is also trending higher (see next chart).

Regardless, as argued earlier today, 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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