Published: 3 December 2010

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Summary

Labour force participation in New Zealand: Recent trends, future scenarios and the impact on economic growth examines labour force participation trends in New Zealand, how we compare to the rest of the OECD and how participation is likely to be affected in the future by population ageing.

To participate in the labour force, a person must either be working or actively seeking work. The labour force participation rate (LFPR) is the percentage of the working-age population (aged 15+ years) who are in the labour force.

Population ageing means the recent growth seen in labour force participation is likely to come to an end, with the LFPR projected to decline over the medium term. Falling participation will have a dampening effect on economic growth. Throughout the report, we investigate the impact of declining participation on gross domestic product (GDP) – the value of what New Zealand produces.

We have looked at official labour force projections and identified a range of scenarios for what participation might look like in the year 2029. In each scenario, we discuss the impact on economic growth.

New Zealand is not alone in facing the issues outlined in the report. Most other OECD countries are in a similar situation to us with respect to population ageing. The report also discusses the latest Australian projections for economic growth in the long term and the increased growth in New Zealand’s productivity that would be necessary to close the gap on Australia.

As well as long-term demographic issues, participation is also affected by short-term economic factors. The report examines the impact of the recent economic downturn and provides a forecast of participation for the next 2 years.

International comparisons

New Zealand had the 4th highest rate of labour force participation in the OECD in 2008 (see Chart 1). Our LFPR was 68.6%, compared to the OECD average of 60.6%.

However, our economic performance is affected by our relatively low level of productivity (GDP per hour worked), where we rank only 25th in the OECD. In comparison, Australia has a lower rate of participation but much higher labour productivity. We are 27% below the OECD average for productivity, while Australia is 6% above the OECD average.

To close the economic gap with countries like Australia and the UK, we need to improve our productivity while maintaining our relatively high level of participation.

Figure 1: Participation rates across the OECD, 2008

Data table for Figure 1

Trends in labour force participation

Labour market participation has increased from 63.8% to 68.2% over the 20 years from 1989–2009. This increase was driven by females (see Chart 2), for whom participation rose from 53.2% to 62.2% over the period, while male participation fell slightly from 75.1% to 74.6%.

Figure 2: Changes in female participation by age, 1989-2009

Data table for Figure 2

There has been a big increase in the participation of older workers (55+ years) while the participation of young people (15–24 years) has declined, partly due to spending more time in education.

Labour force participation also varies by ethnicity (see Chart 3). Europeans have the highest participation rate in each age group except for 65+ years, where they are marginally behind Māori (at 16% compared to 17%). Participation rates for Māori, Pacific peoples and Asians are similar in younger age groups (up to 49 years), but Māori stay in the labour market for longer, with Māori aged 50–64 years having an LFPR of 76% compared to only 62% for Pacific peoples and 61% for Asians.

Figure 3: Participation rates by ethnicity (total response) and age, 2009

Data table for Figure 3

Over the past 20 years, the LFPR has risen for Europeans (from 64% to 70%) and for Māori (from 59% to 67%) but has fallen for Pacific peoples (from 65% to 62%) and for Asians (from 68% to 66%). Asian participation has been climbing, however, since hitting a low point of 54% in 2000.

The LFPR only tells part of the story, as intensity of participation (hours worked) is also important. For employed people in New Zealand, average weekly hours fell from 38.8 hours in 1989 to 37.0 hours in 2009. This decline in hours is related to the increased participation of females and older workers, with both groups on average working for fewer hours than prime-aged males (25–54 years).

The ageing population

The labour force has aged over the past 20 years, and overall participation would have declined by 1.6 percentage points if age-specific participation rates had stayed at their 1989 level. In fact, the LFPR rose by 4.6 percentage points over this period, due to increased participation by females and older workers.

Population projections show that there will be increased downward pressure on participation rates over the next 20 years as the population continues to age. The share of the working-age population (aged 15+ years) who are aged 65+ years is projected to increase from 16% in 2009 up to 25% in 2029.

Not only will the LFPR fall, but an increasing concentration of older workers also means that the average hours worked is likely to decline.

The long-term outlook for participation and economic growth

New Zealand’s economic growth over the last business cycle was boosted by increases in population size, the participation rate and labour productivity. Over the next 20 years, we will need to focus on increased productivity growth, as population ageing will put downward pressure on participation.

Statistics New Zealand projects further increases in the participation of older workers, but population ageing means the overall participation rate would still fall 3.1 percentage points by 2029 (see Chart 3).

Figure 4: Projected total participation rate, 2009–2061

Data table for Figure 4

Based on these Statistics New Zealand projections, we would need to increase the growth of labour productivity from 1.2% to 1.9% per year in order to maintain our recent average growth in GDP per capita of 1.9% per year. If labour productivity growth continues at 1.2% per year, growth in GDP per capita will fall to an average of 1.2% per year over the next 20 years.

Increasing net immigration reduces the effect of population ageing, due to the younger average age of immigrants when compared to the resident population, but its impact on the overall participation rate is limited. Increasing the participation rates of older workers makes a much bigger difference than increasing net immigration.

We examined the effect of boosting the participation of older workers (55–74 years) by advancing their projected participation profile in 2029 by 5 years of age, for example, 70-year-olds were given the projected participation rate of 65-year-olds. This models the effect of delaying the transition towards retirement by a further 5 years.

In this scenario, participation actually increases slightly over the next 20 years, but annual growth in GDP per capita would still fall to 1.5%. This is because participation is increasing more slowly than it has done over the past 20 years.

Over the long term, falling participation may generate economic conditions that are conducive to increasing productivity. This would at least partly compensate for the fall in participation. An increasingly tight labour supply and upward pressure on labour costs could lead to more investment in capital. This would boost growth in labour productivity and GDP per capita.

Ageing across the ditch – the situation in Australia

Australia’s annual average growth of GDP per capita over the next 40 years is projected to be 1.5%, down from 1.9% over the past 40 years. Much like New Zealand, future growth will be driven by increases in labour productivity as participation declines due to population ageing (see Chart 4).

Figure 5: Sources of Australian economic growth

Data table for Figure 5

We have projected that New Zealand’s growth in GDP per capita over the next 40 years will fall from the recent average of 1.9% per year to an average of 1.1% per year if labour productivity continues to grow at an average of 1.2% per year.

New Zealand will need to increase its annual average growth in labour productivity from 1.2% to at least 1.5% to begin closing the economic gap with Australia. Productivity increases can come from a more highly skilled workforce, better matching of people to jobs, incentives for employers to invest more in their capital, better infrastructure and reduced business costs.

Participation through the economic downturn and recovery

Due to the recent economic downturn, the LFPR fell by 0.9 percentage points in the year to December 2009. The most significant falls in participation were for young people, women aged 25–34 years and older workers aged 65+ years.

As part of our analysis, we have produced a forecast of labour force participation, by age and gender, over the 2 years from March 2010 to March 2012.

This forecast suggests participation is likely to stay around its March 2010 level (68.1%) till March 2011 and then increase by 0.5 percentage points in the year to March 2012.

Most of this growth is forecast to come from men aged 55+ years and women aged 50+ years. This continues the trend of increased participation by older workers.

Overall, the LFPR for females is forecast to increase by 0.9 percentage points over the next 2 years, while the LFPR for males is forecast to be almost static (up by 0.1 percentage points).

In the short term then, the economic recovery is forecast to lead to a rise in participation. The downward pressure on participation due to population ageing will be felt in the longer term.