Strategies for lifting Australia’s workforce participation rate

Charlie Nelson
April 2014

As former Treasury secretary Ken Henry said, Australia’s GDP growth rate is a function of three P’s – Population growth, (workforce) Participation rate, and Productivity growth.

I have fitted the three P’s model to Australia’s GDP growth and it fits quite well, see Chart 1. 

Chart 1

 

Over the past few years, Australia’s population growth rate has been quite high by historical standards at 1.8%.  On the other hand, multifactor productivity has been falling for 10 years according to estimates by the Australian Bureau of Statistics.  We will discuss productivity in a future article, although I have published one idea.

The middle P, Participation in the workforce has reached a plateau after many years of growth (Chart 2).  In this chart, I have divided the population either employed or looking for work by the total population (all ages).

Chart 2

The participation rate had been increasing for decades primarily because the number of people entering the workforce (school leavers) exceeded the number leaving (retiring) plus baby boomer females returned to work after family formation in much larger proportions than earlier generations.  For example, workforce participation amongst females aged 55 to 59 increased from 30% in 1986 to 66% in 2013.

There is little more workforce participation growth to be had amongst older females and the leading edge of the large baby boomer generation reached the traditional retirement age of 65 in 2011.  The number of people turning 65 at present is 215,000 per year, a number which is rapidly rising towards 300,000 over the next few years, while the number of people turning 18 is 290,000 per year.

So without a strategy to lift workforce participation it will be in danger of falling.  Accordingly, Australia’s economic growth rate will continue to slow, especially if we don’t manage to lift productivity.

There are two major strategy possibilities, as well as several minor ones.

The first major strategy option is to lift workforce participation amongst the over 65’s.  This is already happening to some degree – participation for males over 65 has risen from 10% to 18% over the past nine years (the rate for females over 65 has risen from 3% to 8%).  However, there is still ageism amongst employers and new roles need to be developed for older workers.  It is important to note that the workforce definition includes only those in paid work.  People over 65 may be caring for grandchildren, allowing their children to work – which has the effect of lifting the participation rate.  They may also be undertaking voluntary community work, which is valuable but not valued by our measure of GDP.  It is conceivable that an extra 300,000 workers could be achieved by significantly lifting workforce participation amongst people aged 65 to 70.

The second major strategy is to cut the birth rate, at least while we deal with the temporary but serious problem of increasing numbers of people reaching the official retirement age (which is gradually increasing beyond 65 to perhaps 70).

This would be a very powerful strategy with a double benefit.  It would reduce the dependency ratio by reducing the number of children.  It would also mean an increase in workforce participation amongst women aged 35 to 54, which is currently 76% compared with 90% for men of the same age.  If the number of births were cut from 300,000 to 250,000 per year, this would mean 500,000 less dependents over the next ten years.  It would also free up perhaps 250,000 females to be in the workforce.

This strategy would also be favourable for our struggling federal budget deficit, by reducing the amount spent on the baby bonus introduced by Peter Costello and by reducing the cost of any taxpayer funded parental leave scheme.

There has been a steady drift downwards in the participation rate of men aged 35 to 54 – from 96% in the late 1970’s to 91% in 2013.  Perhaps more men are at home caring for children and there has been an increase in numbers on disability pensions.  There may be some potential to raise the participation rate amongst this demographic.

 

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