Transcript ppt - Motu Economic and Public Policy Research

Population ageing, productivity and policies
Presentation to NIDEA
at
University of Waikato
Ross Guest
3 Feb 2012
Presentation to NIDEA, University of Waikato, 3 Feb 2012
The politics of population policy
Source: http://www.nicholsoncartoons.com.au/cartoon_6593.html
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
1.
Productivity: What is it?
(i) Individual or age-specific productivity
Productivity
16
45
65
AGE
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)
1.
Productivity: What is it?
(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
Why is productivity important?
C
C Y L

N
Y L N
C/N: living
standards
C/Y:
consumption
share of
GDP
Y/L:
average
labour
productivity
L/N:
employment to
population ratio
or ‘support
ratio’.
Presentation to NIDEA, University of Waikato, 3 Feb 2012
How does population ageing affect C/N ?
C
CY L

N Y LN
?
Net effect on C/N of ageing over next 40 years
for 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
Source: Guest (2007)
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Japan
Italy
Spain
Switz.
Austria
Germany
Korea
France
Belgium
Norway
Netherl.
Portugal
Sweden
Finland
Canada
average
Iceland
Denmark
NEW ZEALAND
United K.
Greece
AUSTRALIA
Czech R.
Ireland
United S.
Luxem.
Hungary
Mexico
Slovak R.
Poland
Turkey
Mexico
Turkey
Iceland
Norway
NEW ZEALAND
United S.
France
Sweden
Denmark
AUSTRALIA
United K.
Luxem.
Belgium
Ireland
average
Finland
Netherl.
Switz.
Canada
Italy
Portugal
Japan
Austria
Spain
Germany
Greece
Hungary
Poland
Slovak R.
Korea
Czech R.
Working age population share
Working age pop share, 2006
0.82
0.8
0.78
0.76
0.74
0.72
0.7
0.68
0.66
0.64
0.62
0.6
Source: OECD
Working age pop share, 2050
0.76
Source: OECD
0.74
0.72
0.7
0.68
0.66
0.64
0.62
0.6
0.58
Source: Guest (2007)
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Italy
Poland
Turkey
Spain
Slovak R.
Hungary
Greece
Belgium
Czech R.
France
Germany
Austria
Japan
Korea
Portugal
average
Luxem.
Finland
Ireland
Mexico
AUSTRALIA
Netherl.
Canada
Switz.
Sweden
United K.
United S.
Norway
NEW ZEALAND
Denmark
Iceland
Turkey
Poland
Italy
Mexico
Hungary
Belgium
France
Greece
Slovak R.
Spain
Luxem.
Germany
Finland
average
Ireland
United S.
Czech R.
Austria
Portugal
AUSTRALIA
Japan
Sweden
Korea
United K.
NEW ZEALAND
Netherl.
Norway
Denmark
Canada
Switz.
Iceland
Labour participation adj.for age-specific productivity
weighted for age-specific individual productivity
LFPR, 2006
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
weighted for age-specific individual productivity
LFPR, 2050
0.6
0.5
0.4
0.3
0.2
0.1
0
Impact of ageing on Y/L
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
Source: Guest (2007)
Sweden
Denmark
Finland
United K.
Ireland
United S.
AUSTRALIA
Norway
Canada
Germany
Portugal
Netherl.
NEW ZEALAND
Belgium
Luxem.
France
Iceland
Turkey
Switz.
average
Austria
Italy
Hungary
Japan
Greece
Spain
Czech R.
Poland
Mexico
Slovak R.
Korea
Saving dividend, 2006 to 2050
(% increase in C/N via Y/L)
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Presentation to NIDEA, University of Waikato, 3 Feb 2012
…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
CY L

N Y LN
By the way: ageing effects C/Y positively – the ‘Solow
effect’.
But estimates are small – about 5% over 40 years.
5. Policy responses to population ageing
(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
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
Pro-fertility policies
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)
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Do pro-fertility policies work ?
• 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.
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Immigration
Source: http://www.nicholsoncartoons.com.au/cartoon_6593.html
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Immigration
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
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
ave
pop age
annual incr in immigration
Presentation to NIDEA, University of Waikato, 3 Feb 2012
Policy scorecard
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 care
eg. vouchers, insurance
Good
Presentation to NIDEA, University of Waikato, 3 Feb 2012
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
Australia’s Future Fund
Aim: to fully fund Aust Govt superannuation liabilities
• already achieved !! now what ?
• tax smoothing the only defensible rationale
• inequitable in intergenerational sense ?
Presentation to NIDEA, University of
Waikato, 3 Feb 2012
Superannuation policy
•
•
compulsory super introduced in 1992
tax incentives for discretionary private super
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
Health and aged care funding
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
Presentation to NIDEA, University of
Waikato, 3 Feb 2012
Health and aged care funding
Potential policy interventions:
• target medical research funding
Access 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 prefunding of aged care
Presentation to NIDEA, University of
Waikato, 3 Feb 2012
References
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 report
nr. 2003-028, Max Planck Institute for Demographic Research.
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Presentation to NIDEA, University of Waikato, 3 Feb 2012
Thanks - nice to be with you
Presentation to NIDEA, University of Waikato, 3 Feb 2012