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Modelling New Zealand's Long-term Fiscal Position - PP 06/01

4.  What will people be doing?

The Long-Term Fiscal Model (LTFM) builds projections of real GDP from the end of the latest macroeconomic forecast by using working-age population, labour participation rates, and assumptions about long-run unemployment and labour productivity.

Under a growth-accounting framework, real GDP is based on the three Ps of Population, Participation and Productivity. Thus, real GDP is equal to:

Population: The total number of people available for workworking-age population (15 and older)
 multiplied by
Participation:  The number actually working and how much they work participation rates  x  (1 – unemployment rate)  x  average hours worked
 multiplied by
Productivity: How much each person produces each hour that she or he worksGDP per hour worked

In the LTFM, we use the growth form rather than the levels form of this identity to project GDP.

Participation

Once the working-age population (in the larger sense of all people 15 and above) has been calculated, the next step in constructing the projection of GDP is to calculate participation rates.

Labour-force participation has been changing in New Zealand since the Second World War. This means that we have had to take a view on whether there will be further changes in this pattern over time.

The pattern of labour-force participation has been changing in New Zealand since the Second World War.[25] This means that we have had to take a view on whether there will be further changes in this pattern over time.

Women’s participation rates have been rising since the Second World War, and women aged 25-54 have had a greater level of participation than their predecessors.[26]

While New Zealand does not have an obligatory retirement age, labour market participation at present drops from 60% or so for people aged 60-64 to 13% or so for those over 65 (both of these rates have risen over the past 20 years, particularly for females, because of the lift in the age of eligibility for New Zealand Superannuation in the 1990s).

Over the last 20 years, participation rates of young men and women have been falling, reflecting the greater enrolment in tertiary education. For the prime working ages (25-54), male participation has fallen as men were displaced by structural change and lacked the skills required by the changing market place. Through this period, prime-aged female participation rose as women moved into new areas of work, adapted to change, worked longer before having children, or decided to remain childless.

These patterns are projected into the future. The result is similar to the high participation projection of the labour force by Statistics New Zealand. Eventually all age-group participation rates stabilise and from that point labour force growth is driven completely by the underlying demographics.

Even though participation of the open-ended 65-plus cohort is expected to rise, aggregate participation falls, as a greater proportion of people spills into the older age groups where participation is lower.

The aggregate participation rate falls from 66% now to 59% by mid-century as the ageing effect outweighs behavioural changes. The labour force grows to mid-century and then begins to decline. Even though participation of the open-ended 65-plus cohort is expected to rise, aggregate participation falls, as a greater proportion of people spills into the older age groups where participation is lower than the average.

Figure 13: Rising female and largely falling male labour participation
Figure 13: Rising female and largely falling male labour participation.
Source: The Treasury

Alternative participation scenarios

New Zealand’s labour force participation rates are high relative to the OECD, and similar OECD countries. However, there is scope for increasing participation, particularly among young women. A Treasury study[27] has calculated the effect on GDP of hypothetical increases in employment from increased participation, taking into account the differences in productivity between new and existing workers. The results suggest that increasing the labour force participation of women aged 25-34 to the average, adjusted for paid maternity leave, of the top five OECD nations increases employment by 28,800, making GDP 1% higher than it actually was in the baseline year 2001. Raising participation overall to the average of the top five OECD countries increases employment by 142,600 and generates an increase of 5.1% in the level of GDP.

Employment and unemployment

The Half Year Economic and Fiscal Update 2005 economic forecast assumes that by 2010 the trend unemployment rate is 4.5% of the labour force and this is assumed to remain constant throughout the projection period. Along with this, average hours worked per employee are also assumed not to change after 2010. This ratio has remained relatively constant for the past decade. Employment grows from 2.05 million in 2005 to 2.45 million in 2050.

Figure 14: Employment projection sees steady but decreasing growth
Figure 14: Employment projection sees steady but decreasing growth.
Source: Statistics New Zealand and the Treasury

Notes

  • [25]See Hurnard (2005), Callister (2005) and Johnston (2005).
  • [26]These observations are based on participation rates derived from the Census. See Hurnard (2005). We created probabilities of entry and exit for each 5-year cohort (except the youngest) and then used these to project participation rates into the future. The lifting of the age of eligibility for New Zealand Superannuation through the 1990s has made it difficult to get “policy-free” exit and entry probabilities for the older age groups, given the shortness of the HLFS dataset. For these age groups, we have been guided by the Bell and Bryant (2004) results and the dynamic cohort results in the Australian Productivity Commission report (2005).
  • [27]Bryant, Jacobsen, Bell and Garrett (2004).
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