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Presentation to NIDEAat
University of Waikato
Ross Guest3 Feb 2012
Population ageing, productivity and policies
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Source: http://www.nicholsoncartoons.com.au/cartoon_6593.html
The politics of population policy
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Outline
1. Productivity: what is it? why is it important?
2. Complementarity of workers by age
3. Fertility, human capital, rate of discoveries
4. Short run effects: Relative prices of labour
and capital; and the K-L ratio
5. A critique of public policy responses to
population ageing (in Australia)Presentation to NIDEA, University of Waikato, 3 Feb 2012
(i) Individual or age-specific productivity
AGE4516 65
Productivity
1. Productivity: What is it?
Evidence from numerous studies based on age-earnings profiles, supervisors’ ratings, work-sample tests and employer-employee matched data sets (see Skirbeck, 2003, for a survey)
(ii) Economy wide technological progress.Determined by:
Factors related to ageing:• knowledge creation, dissemination (education) and application (innovation)• economies of scale• saving for capital accumulation• complementarity of workers by age
Other factors:• laws & institutions (legal, social, cultural)• trade openness• geography and natural resources
1. Productivity: What is it?
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Why is productivity important?
C/N: living standards
C/Y: consumption share of GDP
Y/L: average labour
productivity
L/N: employment to population
ratio or ‘support ratio’.
C C Y LN Y L N
C C Y LN Y L N
?
Net effect on C/N of ageing over next 40 yearsfor Aust & N.Z. ?
Guestimate: 10 to 20% decline over next 40 years.But much uncertainty due to unknown effect on Y/L
Presentation to NIDEA, University of Waikato, 3 Feb 2012
How does population ageing affect C/N ?
Presentation to NIDEA, University of Waikato, 3 Feb 2012
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Presentation to NIDEA, University of Waikato, 3 Feb 2012
Labour participation adj.for age-specific productivity
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Source: Guest (2007)
Impact of ageing on Y/L
Presentation to NIDEA, University of Waikato, 3 Feb 2012
2. Complementarity of workers by age
Demographic macro models typically assume that younger and older workers are perfectly substitutable.
Y = f(K,L)
L is a simple sum of workers (adj. for prod.)i.e. workers are infinitely substitutable
An unrealistic assumption.Young and older workers are complementary to some extent.
Presentation to NIDEA, University of Waikato, 3 Feb 2012
2. Complementarity of workers by age
Research suggests that population ageing in OECD countries will generate a productivity dividend through the complementarity of older and younger workers(Guest, 2005; Prskawetz, Fent and Guest, 2007).
i.e. the change in the age distribution toward older workers is favourable.
The productivity dividend is estimated to be between 1% and 30% in total over 40 years.
Presentation to NIDEA, University of Waikato, 3 Feb 2012
3. Fertility and human capital investments
Parents adopt ‘quantity-quality’ trade-off (Becker and Lewis (1973) with respect to children.
Higher incomes imply a higher opportunity cost of additional children. Hence fertility rates tend to decline with increasing prosperity of societies.
Parents use their greater financial resources to invest in the ‘quality’ of their children, through education for example.
This boosts productivity - and possibly the long run growth rate, according to new growth theorists (Lucas, 1988; Romer, 1990)
Presentation to NIDEA, University of Waikato, 3 Feb 2012
3. Fertility and human capital investments
Evidence for a long run negative fertility-productivity relationship in Guest and Swift (2008) – at least for Australia and the UK.
Against this is the idea that more people produce more ideas which leads to higher productivity – a positive link between fertility and growth (e.g. Jones, 2002).
But this link may not be self-reinforcing: higher productivity leads to higher income and lower fertility.
Presentation to NIDEA, University of Waikato, 3 Feb 2012
4. Short run effects: Relative prices & the K-L ratio
(i) Middle age workers have relatively high saving rates.
As the proportion of middle aged workers rises, aggregate saving rises – a saving dividend.
This implies either in increase in K or foreign assets.
An increase in K/L implies an increase in Y/L.
(ii) K/L can also increase through a slowdown in growth of L due to ageing.
(iii) Ageing implies lower L and hence higher wages which incentives firms to look for labour saving technologies.
Presentation to NIDEA, University of Waikato, 3 Feb 2012
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Saving dividend, 2006 to 2050 (% increase in C/N via Y/L)
Source: Guest (2007)
…the bottom line
The potential effect of ageing on Y/L is very uncertain but could potentially swamp the effect of lower L/N on living standards.
C C Y LN Y L N
By the way: ageing effects C/Y positively – the ‘Solow effect’.But estimates are small – about 5% over 40 years.
(i) Policies to reduce the national economic burden of ageing:
• boosting LFPR of older workers• pro-fertility policies• boosting immigration
(ii) Policies to reduce the fiscal burden
• Future Fund (in Australia)• retirement saving policies • new ways of funding health and aged care
Presentation to NIDEA, University of Waikato, 3 Feb 2012
5. Policy responses to population ageing
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Boosting LFPRs of older workers
• raising LFPRs of older workers the most fruitful way of reducing burden of ageing
• e.g. a gradual increase in LFPRs of 60-69 yr olds to that of current 55-59 yr olds would reduce the drop in L/N to only 5% between now and 2050 (instead of 15%)
• In Australia, for both men and women born on or after 1 July 1952 the pension age will progressively increase from 65 to 67, starting on 1 July 2017, reaching 67 in 2023.
• But – Australia’s tax free super payouts (for over 60s) will probably NOT increase LFPRs of older workers
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Pro-fertility policies
“ If you can have children it's a good thing to do - you should have one for the father, one for the mother and one for the country “
Peter Costello (former Treasurer) as quoted in SMH 12/5/2004
(Source of picture opposite: Sun Herald newspaper)
Presentation to NIDEA, University of Waikato, 3 Feb 2012
A range of family benefits have a dual aim:• income support• promote fertility (by reducing cost of children)
e.g. ‘baby bonus’, ‘family tax benefits’, child care rebate, and ‘parenting payments’.
Collectively amounted to 2 to 3% of GDP on average over past decade (Productivity Commission, 2008)
Pro-fertility policies
Presentation to NIDEA, University of Waikato, 3 Feb 2012
• Australia’s TFR increased from 1.73 to 1.97 between 2001 and 2008.
• Consensus is that MOST of this was NOT due to baby bonus etc, but to fertility catch-up:
• women aged 30-39 now giving birth at higher rates having delayed childbirth when they were younger.
Do pro-fertility policies work ?
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Immigration
Source: http://www.nicholsoncartoons.com.au/cartoon_6593.html
Australia’s population will grow by 30% over the next 20 years.
At least half of this will be due to immigration,
consisting roughly of:• 60% skilled migrants• 30% family reunion migrants• 10% refugees
Immigration
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Immigration
Temporarily increases L/N. About 85% of migrants are aged under 40 when they arrive, compared with 55% for the resident population.
Higher immigration lowers ave pop age but at decreasing rate
Presentation to NIDEA, University of Waikato, 3 Feb 2012
annual incr in immigration
avepop age
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Incr. LFPRs Good
Incr. fertility rate Benign (?) – jury out
Incr. immigration Good, but dimin. effect
Future Fund Benign (at best)
Superannuation Good (only if by incentives)
Health & aged careeg. vouchers, insurance
Good
Policy scorecard
A FINAL WORD
• Optimum population target is futile
• The economic effects of Australia’s and New Zealand’s population ageing are modest
• Good policy is good policy – if it reduces the (modest) burden of ageing all the better:
For example, policies that:• promote productivity• reduce obstacles to labour participation• reduce obstacles to retirement saving
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Aim: to fully fund Aust Govt superannuation liabilities
• already achieved !! now what ?• tax smoothing the only defensible rationale• inequitable in intergenerational sense ?
Australia’s Future Fund
Presentation to NIDEA, University of Waikato, 3 Feb 2012
• compulsory super introduced in 1992• tax incentives for discretionary private super
Superannuation policy
Problems with compulsory private super:
• liquidity constraint on low income earners
• distortion of saving vehicles for high income earners
• compulsory super is a tax on employment
Elimination of the benefits tax in 2007 questionable on grounds of equity, fiscal cost and work participation.
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Increased government expenditure by 2050:
• Health and aged care: 6% to 10.5% of GDP • Half due to ageing
• Aged care: 1% to 2.5% of GDP• Most due to ageing
Health and aged care funding
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Potential policy interventions:
• target medical research fundingAccess Economics: delay average onset of Alzheimer’ disease by 5 months could save $1.3billion in aged care expenditure by 2020
• competition among health care providers through voucher model of funding
• support for home-based aged care
• private long term insurance bonds to encourage pre-funding of aged care
Health and aged care funding
References
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Becker, G. and Lewis, G. (1973) “On the Interaction between Quantity and Quality of Children”, Journal of Political Economy 81, 2, S279-288.
Guest, R. and Swift, R. (2008) “Fertility, Income Inequality and Labour Productivity”, Oxford Economic Papers , 60, 4, 597-618. Level A ranking
Guest, R. (2007) “Can OECD Countries Afford Demographic Change?”, Australian Economic Review 40, 2, 1-16. Level B Ranking
Guest, R. (2005) “A Potential Dividend from Workforce Ageing in Australia” Australian Bulletin of Labour 31, 2, 135-154
Jones, C.I. (2002). Sources of U.S. economic growth in a world of ideas, American Economic Review 92,220-239.
Lattimore, R., and Pobke, C. (2008), ‘Recent trends in Australian Fertility’, Productivity Commission Staff Working Paper, Commonwealth of Australia, Canberra.
Lucas, R. (1988) “On the Mechanics of Economic Development”, Journal of Monetary Economics 22, 1, 3-42.
Prskawetz, A., T. Fent and R. Guest (2007) “Workforce Aging and Labor Productivity. The role of supply and demand for labor in the G7”, in: Prskawetz, Bloom and Lutz (eds.) Population Aging, Human Capital Accumulation, and Productivity Growth, A supplement to Population and Development Review, Population Council, New York.
Romer, P. (1990) “Endogenous Technological Change”, Journal of Political Economy 98, 5, S1971-1102.
Skirbekk, V. (2003), Age and Individual Productivity: A Literature Survey, Technical reportnr. 2003-028, Max Planck Institute for Demographic Research.22
Thanks - nice to be with you
Presentation to NIDEA, University of Waikato, 3 Feb 2012
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