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The demographic challenge to our economic potential Chris Higgins memorial lecture

The demographic challenge to our economic potential Chris Higgins memorial lecture. Ken Henry Secretary to the Treasury Canberra, 13 November 2002. Unemployment. Per cent. Per cent. 12. 12. 10. 10. 8. 8. 6. 6. 4. 4. 2. 2. 0. 0. 60-61. 64-65. 68-69. 72-73. 76-77. 80-81.

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The demographic challenge to our economic potential Chris Higgins memorial lecture

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  1. The demographic challenge to our economic potential Chris Higgins memorial lecture Ken HenrySecretary to the Treasury Canberra, 13 November 2002

  2. Unemployment Per cent Per cent 12 12 10 10 8 8 6 6 4 4 2 2 0 0 60-61 64-65 68-69 72-73 76-77 80-81 84-85 88-89 92-93 96-97 00-01 04-05 08-09

  3. Multi-factor productivity Labour productivity growthwhole economy Per cent Per cent 3.5 3.5 3 3 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 1960s 1970s 1980s 1990s Capital deepening

  4. Population Employment (hours) GDP Participation Capital deepening Multifactor productivity Growth prospectsComponents of GDP Total population Share of population 15+ Participation rate Unemployment rate Average hours worked Productivity

  5. Productivity 33/4 2 Population: +2 Participation: - 1/4 11/2 1/2 1/8 -1/8 -1/4 Components of average annual GDP growth rate over the last 40 years Percentage contribution Percentage contribution 4 4 3 3 2 2 1 1 0 0 -1 -1 Population Share of Participation Unemployment Average hrs Labour Real GDP population 15+ rate rate worked productivity

  6. 11/2 13/4 31/2 1/4 USA Components of average annual GDP growth rate over the last 40 years Percentage contribution Percentage contribution 4 4 Productivity Population Participation 3 3 2 2 33/4 2 2 1 1 -1/4 0 0 -1 -1 Australia

  7. 21/4 13/4 3/4 1/8 -3/8 next 40 years Components of average annual GDP growth rate Percentage contribution Percentage contribution 33/4 4 4 Population Participation Productivity 3 3 2 2 2 11/2 1/2 1 1 1/8 -1/8 -1/4 0 0 -1 -1 Population Share of Participation Unemployment Average hrs Labour Real GDP population 15+ rate rate worked productivity last 40 years

  8. 33/4 11/2 11/2 21/4 21/4 3/4 Past Future Growth rates of GDP per capita - Australia past and future Percentage contribution Percentage contribution GDP growth 4 4 GDP per capita growth Population growth 3 3 2 2 less equals 1 1 0 0 -1 -1 Over 40 years, 3/4 percentage points a year compounds to a third.

  9. 3 3 3 1 1 1 1 - - - 2 2 8 8 8 8 8 1 1 1 1 - - - - 2 2 2 2 3 1 1 - 4 8 8 3 1 - 1 4 4 3 3 7 1 1 1 - - - 2 1 4 2 2 8 4 8 Growth rates of GDP per capita - Australia past and future Past Future Change Total Ageing Total Ageing Total Ageing Population 15+ Participation Age effect Other Productivity 2 Total

  10. Simple demographic model Assumptions Children aged 0-20 Young workers aged 20-40 Older workers aged 40 - 60 Retirees aged 60-80 Only females aged 20-40 give birth No deaths before age 80 Half of births are female No immigration

  11. 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 8.0 8.0 8.0 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% Fertility rate of 2.0 1947 to 1967 to 1987 to 1967 1987 2007 Fertility rate 2.0 2.0 2.0 Children Young workers Older workers Retirees Total Dependency ratios Youth Age Worker ratio

  12. 2.8 3.9 5.5 2.0 2.8 3.9 1.4 2.0 2.8 1.0 1.4 2.0 7.2 10.1 14.2 81.7% 81.7% 81.7% 29.8% 29.8% 29.8% 47.3% 47.3% 47.3% Fertility rate of 2.8 1947 to 1967 to 1987 to 1967 1987 2007 Fertility rate 2.8 2.8 2.8 Children Young workers Older workers Retirees Total Dependency ratios Youth Age Worker ratio

  13. 1.7 1.4 1.2 2.0 1.7 1.4 2.4 2.0 1.7 2.8 2.4 2.0 8.8 7.5 6.4 39.1% 39.1% 39.1% 63.6% 63.6% 63.6% 49.3% 49.3% 49.3% Fertility rate of 1.7 1947 to 1967 to 1987 to 1967 1987 2007 Fertility rate 1.7 1.7 1.7 Children Young workers Older workers Retirees Total Dependency ratios Youth Age Worker ratio

  14. Steady state dependency and‘worker ratios’ Fertility rate 1.7 2.0 2.8 Dependency ratios Youth 39.1% 50.0% 81.7% Age 63.6% 50.0% 29.8% Worker ratio 49.3% 50.0% 47.3%

  15. G D 1.4% 4.2% not A Fertility rates - steady state choicesRatio of workers to total population 1.7 2.0 2.8

  16. 7.2 2.0 1.4 1.0 2.8 Baby boomers Number of workers 3.4 Worker ratio 47.3% Age dependency ratio 29.8% Youth dependency ratio 81.7% Stylised population distribution 1947 to 1967 - fertility rate is 2.8 4.0 3.0 2.0 1.0 - Young Older Total Kids Retirees workers workers

  17. Baby boomers Number of workers 4.8 Worker ratio 55.8% Age dependency ratio 29.8% Youth dependency ratio 49.6% Stylised population distribution 1967 to 1987 - fertility rate is 1.7 4.0 3.0 2.0 1.0 - Young Older Total Kids Retirees workers workers 8.6 2.8 2.0 1.4 2.4

  18. Baby boomers Number of workers 5.2 Worker ratio 56.3% Age dependency ratio 38.6% Youth dependency ratio 39.1% Stylised population distribution 1987 to 2007 - fertility rate is 1.7 4.0 3.0 2.0 1.0 - Young Older Total Kids Retirees workers workers 9.2 2.0 2.4 2.8 2.0

  19. Baby boomers Number of workers 4.4 Worker ratio 49.3% Age dependency ratio 63.6% Youth dependency ratio 39.1% Stylised population distribution 2007 to 2027 - fertility rate is 1.7 4.0 3.0 2.0 1.0 - Young Older Kids Retirees Total workers workers 1.7 2.0 2.4 2.8 8.9

  20. C B 18% G D 1.4% 19% 4.2% E F A Fertility rates adjustment pathsRatio of workers to total population 1.7 2.0 2.8

  21. TFR = 1.74 TFR=2.1 Ratio of workers to total population 69% 67% 65% 63% 61% 59% 57% 2004 2008 2012 2016 2020 2022 2026 2030 2034 2038 2042 2046 2048 2052 2056 2060 2064 2070 2000 2002 2006 2010 2014 2018 2024 2028 2032 2036 2040 2044 2050 2054 2058 2062 2066 2068 2072

  22. Background slides

  23. Population growth rate Per cent Per cent 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 60-61 63-64 66-67 69-70 72-73 75-76 78-79 81-82 84-85 87-88 90-91 93-94 96-97 99-00

  24. Fertility rate Total fertility rate Total fertility rate 2.8 2.8 2.6 2.6 2.4 2.4 2.2 2.2 Replacement rate 2.0 2.0 1.8 1.8 1.6 1.6 1972 1976 1980 1984 1988 1992 1996 2000

  25. Net migration Persons ('000) Persons ('000) 200 200 180 180 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999

  26. Population growth rate projections Per cent Per cent 2.5 2.5 IGR projections 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 60-61 67-68 74-75 81-82 88-89 95-96 02-03 09-10 16-17 23-24 30-31 37-38 Continue

  27. Proportion of the population aged 15+ Per cent Per cent 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 60-61 63-64 66-67 69-70 72-73 75-76 78-79 81-82 84-85 87-88 90-91 93-94 96-97 99-00

  28. Population 15+ - projections Per cent Per cent 90 90 80 80 IGR projections 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 60-61 67-68 74-75 81-82 88-89 95-96 02-03 09-10 16-17 23-24 30-31 37-38

  29. 2002 2022 2042 Population ageing Index value (2002 base=100) Index value (2002 base=100) 450 450 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 0 to 14 15 to 54 55 to 64 65 to 84 85+ Total Continue

  30. Participation rate Per cent Per cent 68 68 66 66 64 64 62 62 60 60 58 58 56 56 54 54 52 52 50 50 60-61 63-64 66-67 69-70 72-73 75-76 78-79 81-82 84-85 87-88 90-91 93-94 96-97 99-00

  31. With changing age structure Participation rate projections Per cent Per cent 68 68 With 2000-01 age structure 66 66 64 64 62 62 60 60 58 58 56 56 54 54 52 IGR projections 52 50 50 60-61 67-68 74-75 81-82 88-89 95-96 02-03 09-10 16-17 23-24 30-31 37-38 Continue

  32. Unemployment - past and projected Per cent Per cent 12 12 IGR projections 10 10 8 8 6 6 4 4 2 2 0 0 60-61 64-65 68-69 72-73 76-77 80-81 84-85 88-89 92-93 96-97 00-01 04-05 08-09 Continue

  33. Average hours worked Hours per week Hours per week 40 40 39 39 38 38 37 37 36 36 35 35 34 34 33 33 32 32 31 31 60-61 64-65 68-69 72-73 76-77 80-81 84-85 88-89 92-93 96-97 00-01 04-05 08-09 Continue

  34. IGR projections Labour productivity growth - past and projected Per cent Per cent 3.5 3.5 3 3 2.5 2.5 2 2 1.5 1.5 1 1 0.5 0.5 0 0 1960s 1970s 1980s 1990s 2000s 2010s Multi-factor productivity Capital deepening Labour productivity Continue

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