3  Modelling the effect of increased labour force participation on GDP

3.1  Labour force participation scenarios

In this section we develop two scenarios of increased labour force participation. The scenarios do not represent policy targets, but rather are used simply to illustrate the potential magnitude of the effects of increased participation on GDP.

We generate a “young women” scenario, representing an increase in labour force participation among women aged 25-34, and an “overall” scenario, representing an increase in participation across the whole population aged 15 and over. We choose our scenarios by looking at participation rates in the OECD sample, which show what comparable countries have achieved, and at New Zealand’s actual rates.

To generate the “young women” scenario, we set the participation rate for women aged 25-34 equal to the adjusted average rate (see Appendix 4) for the five OECD countries with the highest rates, and leave other rates unchanged. The actual 2001 rate for New Zealand women aged 25-34 was only 67.8%, while the adjusted average of the top five was 78.8%, so the “young women” scenario entails an increase of 11 points.

New Zealand’s labour force participation rate for all people aged 15 and over was already a relatively high 66.0% in 2001. To obtain an equivalent “overall” scenario to the “young women” scenario, we set the overall rate equal to the average of the top 5 countries in the sample, which is 71.1%. To calculate GDP per employee for this scenario, we also need employment rates for individual age groups. We derive the age-specific rates by adding 5.1% to each of the actual rates. (The figure of 5.1% comes from subtracting the actual overall rate from the target overall rate.) Table 1 shows the actual and hypothetical rates.

Source – Calculated from data in the OECD Labour Market Indicators online database.

The number of actual labour market participants, and the number of extra participants implied by the hypothetical sets of rates, depends on the population in each age group. Table 2 shows actual participants in 2001, and the extra participants under the two scenarios.

Source – Calculated from data in the OECD Labour Market Indicators online database.

3.2  New employees

Some of the extra labour force participants will not contribute to GDP because they are unemployed. Table 3 shows unemployment rates for New Zealand in 2001. We assume that the extra labour force participants experience these rates. The ensuing numbers of extra employees are shown in Table 4.

Source – Calculated from data in the OECD Labour Market Data online database.

Note – The unemployment rate is defined as the number of people who are unemployed divided by the number of people who are in the labour force.