2  The economics of participation

2.1  The basic model of labour supply

People choose how much time they will spend working (per week, say, or per year) by weighing up the competing attractions of work and non-work activities. By working for pay, people earn money with which they can buy goods and services. On the other hand, people also value what they can do outside of paid employment, including unpaid production (housework, looking after children, painting the house, voluntary work, etc), study and leisure time.

According to the basic economic model of labour supply, people will spend more time in paid work if the goods they could buy with their extra income would be more valuable to them than the non-work activities they would have to forego (and vice versa). People do these sorts of calculations, for example, when they decide whether to work part-time rather than full-time, to get a second job, or to take a few months leave without pay to travel overseas. In this way, people decide how much work will maximise the satisfaction they get from both consuming goods and undertaking non-work activities.[1]

This description reveals the two key elements lying behind labour supply decisions. One is the net return that people get from different amounts of work, that is, what they will have in their pockets once they have earned wages; paid income tax, créche fees, transport costs, etc; and have lost any entitlement to benefit income or subsidies. The other key element is the value that people place on non-work activities relative to the consumption of goods and services. This valuation is likely to be affected by factors such as family commitments, hobbies and interests, and how productive individuals are at performing household tasks. People often put a high value, for example, on spending time with their children, particularly during the first, formative years of their lives.

Some people do not wish to work, since their satisfaction is maximised (given prevailing wage rates[2], income taxes, etc) by working no hours at all. These people are not participating in the labour force. They are in a situation where the income to be gained from paid work is not sufficiently attractive to lure them into giving up any of their non-work activities. On the other hand, people whose satisfaction is maximised by working one or more hours a week are said to be participating in the labour force. People are participating in the labour force if they are actually employed, full-time or part-time, or if they are unemployed and actively seeking work. The “participation rate” for a particular group is the proportion of that group who are participating, that is, who are employed or unemployed.

This simple model of labour supply has been extended in many different ways, to incorporate further aspects of labour supply decisions—for example to recognise that labour supply decisions are often made by families, rather than by individuals—or to take into account dynamic effects happening across the lifecycle. But even the simple model is useful for understanding the patterns of participation we observe in New Zealand and for making broad predictions about the effects of policies. For example, we would expect to see that higher skilled people, who command higher wages, are more likely to be participating than lower skilled people. We would also expect to see that parents of children, especially young children, have relatively low participation rates as they have many things they would like to do, or feel they have to do, with their non-work time. In terms of policy changes, the model predicts, for example, that a childcare subsidy would increase the labour force participation of mothers of pre-schoolers, since the subsidy would have the effect of increasing the net return that these mothers get from working.

2.2  Why raise participation?

Recent interest in raising labour force participation in New Zealand has been motivated, in the first instance, by a consideration of economic growth. Mathematically, an increase in participation leads to an increase in the number of hours of work done in the country, which in turn leads to an increase in GDP per capita (all else being equal). This is evident from a consideration of the growth accounting framework used by the Ministry of Economic Development and Treasury (2005), which is outlined in the Appendix. In its Economic Survey of New Zealand, the OECD (2003a) also made this point, stating that an increase in participation would help towards New Zealand’s goal of being in the top half of OECD countries for GDP per capita. The degree to which this might happen has been explored by Bryant, Jacobsen, Bell and Garrett (2004).

From international comparisons, Bryant et al (2004) also identified that New Zealand stands out amongst OECD countries for having low participation rates for women aged 25 to 34 years. The marked dip in New Zealand women’s participation at this stage in the lifecycle does not appear to be a common feature in the OECD. In both the 25-29 year age group and the 30-34 year age group, participation rates for New Zealand women are ranked 22^nd out of 24 OECD countries. This suggests, on the face of it, that younger women constitute a population group in which New Zealand could fruitfully encourage participation. The labour force participation of younger women, especially mothers, has therefore been a focus of recent policy discussions in New Zealand. The Prime Minister has said that the Government will look at a range of policies, including parental leave and childcare policies, to see how to boost both women’s participation in the workforce and good outcomes for children (Clark 2005).

It is important to bear in mind, though, that the total quantity of work done in New Zealand, given the size of our population, is in fact very high by international standards. Figure 1 shows, for each country in the OECD, the number of hours worked each year per person of working age (15 to 64 years). Compared to people in other developed countries, New Zealanders spend a lot of time at work. The productivity of this work, however—the value of the goods and services produced per hour—is relatively low in New Zealand. Both the Ministry of Economic Development and Treasury (2005) and the OECD (2003a) consider that raising productivity, rather than increasing the quantity of work undertaken, is the key to a sustainable increase in New Zealand’s GDP per capita.

Figure 1 – Annual hours of work per person, men and women combined, for the population aged 15-64

Source: Calculated from OECD Labour Market Statistics, 2003 data.

Raising labour force participation also has costs. In particular, as discussed in Section 2.1 above, an increase in paid work (which contributes to GDP) involves a trade-off with other uses of people’s time. These other activities, like child rearing, housework, and leisure time, are not paid (so do not contribute to GDP) but are nonetheless valuable and contribute to the overall welfare of the country.

Nevertheless, it is clear that government policies already do affect people’s decisions to participate in the labour force, whether or not this is the explicit or primary aim of these policies. In particular, government policies affect the net return that individuals and families get from working, which is a key element in their decisions about labour force participation (Section 2.1).[3] It is therefore worthwhile looking at whether some of these policies can be adjusted, or new ones developed, to encourage more people to participate in the workforce, taking into account the costs and benefits of this increased participation. The OECD (2003a) noted that, despite reasonably high overall participation rates, there are some groups of New Zealanders who do not experience good labour market outcomes. It may be, too, that increased participation is a desirable goal in itself, regardless of any contribution to the overall quantity of work done in New Zealand. In other words, society may consider it preferable to have more people in the labour force working fewer hours on average than they do now. An increase in women’s labour force participation may be considered particularly valuable, in order to achieve some goals in the area of gender equity.

Whatever the policy rationale, a quantitative understanding of women’s labour force participation is essential for formulating policy advice in this area. The remainder of this paper is devoted to providing such an understanding, looking at the participation of different groups of women in New Zealand and comparing these patterns of participation with those found in other OECD countries. Further discussion of the rationale for policy interventions, and the nature of possible interventions, is left to other papers in this workshop.