5 Conclusion
New Zealand’s labour force participation rates are lower than the average of the top five comparable countries in the OECD. The gap is particularly wide for women aged 25-34, where New Zealand rates are also lower than the median, suggesting that there is some scope to increase their participation in the work force. The OECD has suggested that increases in labour force participation could make a substantial contribution towards reducing the gap in per capita incomes between New Zealand and the rest of the OECD.
We have used scenarios that increase the labour force participation of young women and increase participation overall. These scenarios do not represent aspirational targets, and although a multitude of other scenarios are possible, they indicate the magnitude of the effect of increased participation. We have also examined a number of other alternatives, using different assumptions about productivity, employment and hours worked.
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 5 OECD nations increases employment by 28,800 and generates an additional $1,215million of GDP, making GDP 1.0% higher than it actually was in the baseline year 2001.
Raising participation overall to the average of the top 5 OECD countries increases employment by 142,600 and generates additional $6,101 million of GDP, an increase of 5.1% more than it would otherwise have been.
The results suggest that increases in participation do increase GDP. However, they also show that differences in productivity between new and existing workers matter—increases in participation lead to a less than proportional increase in GDP. Yet the scenarios considered are static, and it is likely that new workers would enhance their productivity over time, so the sustained impact is likely to be higher. At the same time, however, the extra workers require considerable capital investment just to achieve the assumed productivity levels.
It is evident that a key target group for increasing participation is young women. However, it is not clear to what extent increased participation by young women would lead to real increases in output. For example, if the effect is simply to substitute paid for unpaid work such as childcare, there might be an effect on measured GDP, but the real impact on the economy might be overestimated. On the other hand, the real impact of increased participation may be underestimated since effects such as increased social inclusion, higher incomes and outcomes for children are not captured in measured GDP(Blank 2000).
GDP has well-known limitations as a measure of well-being. However, some of the factors that drive GDP also have important implications for well-being. In particular, employment has important effects on both income and well-being as it provides social inclusion and protects against poverty. It also has intergenerational effects, and entering employment from welfare can break the cycle of disadvantage and poverty for the worker and his or her children.
The fiscal implications of increased participation are not considered in the paper. Low participation can be fiscally costly to the extent that non-participants receive welfare benefits, so that increased participation can reduce the fiscal burden and increase tax revenues. However, government policies to increase participation can be fiscally costly. In addition, they have opportunity costs.
This paper is an initial step in a wider research programme on labour force participation. It has simply addressed a simple question: “What would be the output effects of increasing labour force participation?” The results suggest that increased participation would increase economic activity by $6,101million. These estimates also provide an indication of how much it would be worthwhile spending in order to lift participation rates.
An important issue is the extent to which government policy is in fact able to assist in raising participation. The behavioural responses of marginal workers to changes in government policies that directly or indirectly affect them are important in determining the effects on the labour supply. In addition, government policies designed to increase labour force participation are costly, and their efficacy is variable (Blundell 2001). Evaluations of policies typically focus on the private, equity effects benefits of getting people into work rather than on the effects on economic growth (see for example, Blank 2002). Evidence from welfare-to-work policies in the US suggest a combination of pre-and post-employment strategies are successful in getting people into jobs (Gueron and Hamilton 2002).
Furthermore, the estimates of the effects of participation on GDP are premised on the existence of sufficient demand to absorb the extra workers. Clearly, the impact of increased participation in an economic downturn might simply to add to unemployment rather than to employment.
Increasing participation in the workforce that increases output per worker contributes to the output of the economy as a whole. This paper shows that increasing labour force participation could therefore help to close the gap between New Zealand and the rest of the OECD. Future work will focus on examining how labour force participation can be increased.
