Pearls and Irritations

A lower fertility rate and lower NOM for the foreseeable future will mean that Australia will age much more rapidly than forecast in the 2015 Intergenerational Report and in the 2019 Budget.

Research on the economic impact of population ageing is remarkably consistent in finding that it will:

• slow economic growth including per capita economic growth;
• lower participation rates and the employment to population ratio;
• lower productivity growth and increase income/wealth inequality;
• reduce private consumption expenditure and business investment;
• increase pressure on government budgets by reducing growth in tax revenue and increasing pressure on health and aged care expenditure.

While most developed nations (eg in Europe and Japan) have been ageing for much longer, Australia’s working-age to population (WAP) ratio peaked in 2009 at around 67.5 percent after rising from around 61 percent in 1960. By 2019 it had fallen by around two percentage points to 65.3 percent (Chart 1). Australia’s population is ageing but not as rapidly as other developed nations.

Source: ABS Cat: 3105 and 3101 Series C

Australia’s WAP ratio is projected to decline by another 1.9 percentage points by 2030 to 63.8 percent assuming net overseas migration (NOM) averaging 175,000 per annum, a fertility rate of around 1.65 babies per woman and life expectancy growing but slightly more slowly than assumed in earlier ABS population projections.

Since 2009, GDP growth has averaged 0.6 percent per quarter while per capita GDP growth has averaged 0.2 percent per quarter (see Chart 2). During the 10 years prior to that, GDP growth averaged 0.8 percent per quarter and GDP per capita grew by an average of 0.4 percent per quarter.

Source: ABS Cat 5206

The crucial policy question is whether the lower rate of per capita GDP growth in Australia since 2009 has been impacted by the declining WAP ratio and whether this negative impact will continue as the WAP ratio continues to fall over the next 20 years?

The Government’s favoured framework for considering the long-term impact of population change on economic growth is that of the three Ps – that is the combination of population, productivity and participation. In the period 2009-19, both the participation rate and the population growth rate were higher than in the period 2000-09 (ABS Cat 3101). It thus comes down to the question of productivity.

Was Australia’s lower rate of productivity impacted by population ageing?

According to the Productivity Commission (2019), Australia’s labour productivity has been weak since at least 2012-13. In each of 2015-16 and 2016-17, labour productivity was 0.9 percent and fell to 0.2 percent in 2017-18. In 2017-18, labour inputs outstripped capital inputs thus leading to a negative impact on the capital to labour ratio (ie capital shallowing). As employment growth and NOM were both strong, real GDP growth was a respectable 2.8 percent in 2017-18 but was well below that level in 2018-19 at around 1.4 percent.

A key concern of the Productivity Commission is the slow growth in capital investment, particularly slow growth in research and development capital. Also of concern is that the share of businesses that are ‘innovators’ is, according to the Productivity Commission, ‘no longer growing’.

In a 1938 article titled Population Problems and Politics, Nobel prize-winning economist Gunner Myrdal argued: “age distribution has consequences both for the productivity of people and for total consumptive demand.”[i]  He said that with an ageing population, “young people will have an easier chance to ‘get-in’ but they will meet greater difficulties in ‘getting-on’ and ‘getting upward’.”

More recently, Feyrer (2007)[ii] finds “changes in workforce demographics have a strong and significant correlation with the growth rate of productivity. Changes in the proportion of workers between the ages of 40 and 49 seem to be associated with productivity growth. A 5% increase in the size of this cohort over a ten-year period is associated with a 1%–2% higher productivity growth in each year of the decade”.

He also finds that large cohorts aged 15-39 are associated with lower productivity. The findings for the cohort aged 50-59 is negative but only marginally so while the productivity impact of a large cohort over 60 is generally negative.

Aiyer, Ebeke and Shao (2016)[iii] similarly find that “workforce aging has direct implications for labour productivity. They consider that if different age cohorts differ in their productivity, then changes in the age distribution of the workforce will affect average output per worker.”

Berk and Weil (2015)[iv] find that “as populations age, the degree to which workers׳ human capital reflects the cutting edge of technology falls because education took place further in the past.”

GDP per hours worked

The Productivity Commission (2019) notes that “while Australia has experienced a productivity slowdown, it has been more persistent and extreme in many other countries.”

One measure of productivity is real GDP per hour worked. Table 1 shows the OECD index of real GDP per hours worked for major OECD economies. Over the past eight years, real GDP per hour worked has increased by less than 1 percent per annum for the OECD as a whole. Australia has performed slightly better over the eight-year period noting Australia has a significantly lower median age than most OECD countries and is projected to age more slowly due to both a higher rate of NOM and a higher fertility rate.

The WAP ratio for all OECD economies is now in decline (UN Population Prospects 2019 Revision). South Korea was the last major developed economy to reach a peak in its working-age to population ratio in 2012 while China reached this in 2010. The USA, Canada and the UK reached this point in 2007 while Japan and most major economies in Europe reached this point much earlier. The developed world as a whole has now been ageing for around a decade. The 2020s will be the second decade the developed world has been ageing simultaneously.

Table 1: OCED Index of Real GDP Per Hour Worked for Major Developed Economies

	2010	2011	2012	2013	2014	2015	2016	2017	2018
Australia	100	101.2	103.6	105.4	106.0	108.8	108.5	109.7	110.4
Canada	100	101.6	101.9	103.2	105.9	105.7	106.1	107.9	107.7
France	100	101.0	101.3	102.7	103.7	104.5	104.8	107.3	108.8
Germany	100	102.1	102.7	103.5	104.6	105.2	106.7	107.6	107.6
Italy	100	100.5	100.2	101.1	101.3	101.5	101.1	101.7	101.5
Japan	100	100.2	101.2	103.3	103.3	104.8	104.7	106.0	106.5
South Korea	100	102.9	104.3	106.3	108.7	109.6	112.5	117.0	NA
OECD	100	101.0	101.6	102.6	103.5	104.5	104.9	106.3	NA
Spain	100	101.4	103.5	104.9	105.2	105.8	106.3	107.4	107.2
UK	100	100.3	99.8	100	100.2	101.9	101.3	102.2	102.8
USA	100	100	100.4	100.8	101.4	102.1	102.2	103.4	NA

Source: OECD Open Data. 2010 is Base Year

Wages

Weak productivity growth has unsurprisingly coincided with weak wages growth (see Chart 3).

Source: ABS Cat: 6345

Chart 4 highlights a strong relationship between a declining WAP ratio and weak growth in the wage price index (Pearson Correlation of 0.869 with a 95 percent confidence interval).

ABS Cat: 6345, 3101 and 3222

While much of the research anticipates strong wages growth associated with ageing (due to assumed labour shortages), evidence of the last decade across countries such as the USA, UK, Canada and Australia, and earlier for countries in continental Europe as well as Japan, suggests weaker economic growth, weaker productivity growth and weaker household consumption associated with ageing has been having a greater impact on wages than general labour shortages.

Hours Worked

The negative impact of a declining WAP ratio is further confirmed in Chart 5 which highlights a steadily declining number of hours worked per month per adult (ie people aged 15+) since around 2011.

Source: ABS Cat: 6202 and 3101

This measure incorporates the impact of unemployment, participation, underemployment and population ageing.

Chart 5 highlights the impact of the 1982-83 recession when average hours worked per month per adult fell to 95.4 and the 1992-93 recession when it fell to 98.9. After peaking at 108.1 in June 2008, it fell sharply after the Global Financial Crisis to 103.6, recovering only briefly in 2010 and 2011, largely due to the Government’s fiscal stimulus.

It has been in a slow and steady decline ever since. By June 2019 it had reached 99.7. The first time in 40 years it has been below 100 outside a recession. It will have fallen very sharply due to the coronavirus crisis and should bounce back after lockdown restrictions are removed. But with a falling WAP ratio, it is unlikely to ever return to 100 hours per month per adult.

Private Consumption

Population ageing also drives down per capita private consumption as older households have lower levels of private consumption compared to younger households (see Chart 6).

Source: ABC Cat: 5204

There has been a slight narrowing of the private consumption gap between older and younger households. This may reflect the rising participation rates of older Australians. However, this is not showing up strongly in terms of the gap between income taxes paid by older and younger Australians. That gap has been widening (see Chart 7).

Source: ABS Cat 5204

Government budgets and the 2021 Intergenerational Report

The negative impact of an ageing population will extend to Government budgets through weaker revenue growth as older households pay significantly less income tax (see Chart 7) and have a much higher demand for health, social support and aged care services (see successive Intergenerational Reports).

A lower fertility rate and lower NOM for the foreseeable future will mean that Australia will age much more rapidly than forecast in the 2015 Intergenerational Report and in the 2019 Budget.

In its 2021 Intergenerational Report, the Government will have no choice but to retreat from its real economic growth assumption of 3 percent per annum for the decade of the 2020s.

 

[i] MYRDAL, Gunner, Population Problems and Politics, 1938

[ii] FEYRER, James, Demographics and Productivity, The Review of Economics and Statistics, 89(1), February 2007

[iii] AIYER, Shekhar, EBEKE, Christian and SHAO, Xiaobo, The Impact of Workforce Aging on European Productivity, IMF Working Paper 16/238, December 2016

[iv] BERK, Jillian and WEIL, David, Old teachers, old ideas, and the effect of population aging on economic growth, Research in Economics, Vol 69, Issue 1, December 2015