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4  Economy

4.1  The three Ps

The initial five years of the projections, from 2009 to 2013, are taken from the forecasts prepared for the Budget 2009 Economic and Fiscal Update.[8] Over the projection period, from 2014 to 2050, real GDP is determined by a simple production function with three drivers: population, participation and productivity (the three Ps), as shown in Table 4.1.

Table 4.1 - The three Ps of GDP

Table 4.1 - The three Ps of GDP.

4.2  Population and labour force participation

Total population is discussed above in Section 3. There are two concepts of the working-age population. One is based on the Household Labour Force Survey sampling of the civilian, non-institutional population aged 15 and older. This number differs from the (census-based) population of people 15 and older because of HLFS sampling error versus census, and that HLFS excludes people in the armed forces and non-private dwellings (eg, retirement homes, hospitals, prisons), while the census includes everyone who is in New Zealand on census night.

The Treasury produces a five-year forecast of an aggregate participation rate, based on the HLFS, using the New Zealand Treasury Model (NZTM), a general equilibrium macroeconomic model (Ryan and Szeto, 2009). This forecast will reflect the effects of any business cycle in the NZTM forecast. When multiplied by census-based population projections of people 15 and older, the result does not exactly match the HLFS labour force. In preparing data for the LTFM, we break out this single aggregate time series into a historically consistent series of five-year age and gender group participation rates.

The working age population (defined as people aged between 15 and 64) declines from 66% of the total population in 2009 to 58% in 2060. Growth of this group falls from around 1% in 2009 to under 0.5% in 2012 as the baby boomers start turning 65. By 2050, working age population growth stalls.

A person is recorded as participating in the labour force if he or she works at least one hour a week, or is unemployed but “actively” searching for work. Contributions to real output come from hours worked per week, and the amount of output done per hour on average. As the population ages, people will live longer, will likely be healthier, and be working longer in their lives. Offsetting this increased participation by older people will perhaps be more part-time work, and possibly in jobs where output per hour worked (productivity) may not be as high as it was earlier in their lives.[9]

The LTFM uses Statistics New Zealand population projections which, as noted above, are inconsistent with the working-age population derived from the HLFS. The five-year labour force forecast (derived from participation rates and HLFS-consistent working age population) is then blended with a trend projection of participation rates and the census-based population projections to produce a projected labour force in the LTFM.

The trend participation rates are produced using a dynamic cohort method based on historical behaviour by age and gender groups and the latest HLFS participation rates.

4.2.1  Dynamic cohort method of projecting participation rates

This method is based on the observation that the participation of a five-year age group in a particular year will depend on the participation of similar people five years earlier (a synthetic cohort), modified by the probability of their entry into and exit from the labour force. So this method shifts a cohort's past patterns through time as the cohort ages and dampens these effects through time. This projection method has been documented, and used, by the Australian Productivity Commission, OECD, and the United Kingdom's long-term public finance projections.[10]

As a result, the trend towards increasing female labour force participation continues - for those older than 25, who are less influenced by tertiary education participation trends. It requires taking a position on how the 15-19-year-olds are likely to behave through time (these are treated as exogenous). Here it is assumed that their labour force participation will rise only slightly as they are judged to have almost reached peak participation in tertiary education and training.

Estimates of entry and exit probabilities are based on age-group behaviour over the past five years (HLFS) and these estimates are cross-checked against the Productivity Commission and Statistics New Zealand's short-run participation projections. Selecting these trend probabilities is more of an art than a science. The formulas used to calculate them are then turned around to create the trend participation rates.

There are some clear trends over the longer term; for example, entry probabilities for females fall in the late 20s and early 30s at around the period of prime child-bearing. Males in mid-to-late 40s and older have shown a tendency towards static or falling participation, while female participation for this group has grown strongly. The probability of exit jumps after 65 for both sexes, but falls slightly for those in their 70s.

The near-term forecast age-sex participation rates, produced as part of the economic forecast for Budget 2009 (including the effect of the recession), are transitioned to long-term trend rates produced by Statistics New Zealand. This transition occurs over the initial three years of the projection.

The proportion of males and females in the labour force is projected to decline despite static or increasing labour force participation rates at most ages. This apparent contradiction is caused by the changing age structure of the population, with an increasing proportion of the population and labour force at older ages.

Figure 4.1 - Aggregate labour force participation rate
Figure 4.1 - Aggregate labour force participation rate.
Sources: The Treasury and Statistics New Zealand

4.2.2  Employment and unemployment

The forecast of the unemployment rate comes from the Budget 2009, which reflects assumptions about the recession and subsequent recovery. This is then gradually moved to the long-term unemployment rate (4.5%), which is consistent with the estimates of NAIRU in Szeto and Guy (2004) and used as an anchor for the longer-term projections. This is the Treasury's estimate for the unemployment rate where inflation is stable. Projected employment then is the product of the labour force and 1 minus the assumed unemployment rate (a fixed 95.5% of the labour force).

Figure 4.2 - Unemployment rate
Figure 4.2 - Unemployment rate.
Sources: The Treasury, Statistics New Zealand and Briggs (2003)

Notes

  • [8]Further detail of the methodology used for these forecasts can be found at http://www.treasury.govt.nz/budget/forecasts/befu2009.
  • [9]Changes in the mix of employment between the sexes, ages and full-time versus part-time status has meant a fall in the aggregate hours worked over the past few decades. Growing numbers of older people working in part-time jobs could see this aggregate decline continue. See the Productivity Commission (2005), p 62. The effect of ageing on productivity is more vexed. Studies indicate that average productivity levels rise with age before declining after middle age and so changes in the age mix of the labour force may affect aggregate productivity. However, over the 40 or so years of these projections, the gains in productivity of younger workers may roughly balance the productivity decline of older workers, producing a negligible effect on the aggregate. Some research also indicates that the productivity contributions from each group may be complementary. Op. cit., p95.
  • [10]See the Productivity Commission (2005, Technical Paper 3: Cohort analysis), Burniaux, et al. (2005, Annex 3: Static vs Dynamic Baseline Scenarios), HM Treasury (2005, Annex B: Projecting Employment Trends, p71).
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