I always like reading a commentator that can look through short-term cyclical noise to articulate longer-term structural trends. Business Spectator’s Callum Pickering has written such a piece today, describing the structural headwinds facing the Australian labour market – a pet topic of mine over the past three years:
Perhaps the most pressing issue is that there is little reason for the participation rate to turn around. The baby boomers began turning 65 in 2011, and since then we have seen a distinct decline in the participation rate. An ageing population will continue to put downward pressure on the participation rate for a number of decades.
The participation rate will eventually push below its average in the 1990s, well below I suspect, though this process will occur over a number of years. The obvious implication is that it will become more difficult to maintain the type of growth that Australians have become accustomed to. We are at the beginning of a structural shift in the labour market, with the demographics working against growth for the first time in decades.
For years, favourable demographics hid our lacklustre productivity performance. Unless that improves, we will soon find that what we consider ‘trend growth’ is little more than a pipedream. Labour market participation and an ageing population will prove to be a huge issue for Australia – and indeed most of the developed work – in the years ahead.
Anyone ignoring the participation issue at the moment is fundamentally misreading the Australian labour market and by extension too optimistic about the domestic economy…
Spot on. The ageing of the Australian population as the baby boomers shift into retirement en masse is one of the biggest challenges facing the economy and government finances. As shown in the next chart, after decades of favourable demographics, the proportion of workers to non-workers is projected to shrink under each of the Australian Bureau of Statistics’ population growth scenarios:
This phenomenon will also cause the employment-to-population ratio and participation rate to trend lower over time (see next chart), reducing the economy’s growth potential in the process, lowering tax receipts, and raising health and ageing costs for the Government.
As correctly noted by Pickering, there’s no silver lining in Australia’s ageing labour market, with worsening demographics set to take an increasing toll on the economy and Budget.
