Presentation to NIDEA at University of Waikato

1. Population ageing, productivity and policies Presentation to NIDEAatUniversity of Waikato Ross Guest 3 Feb 2012 Presentation to NIDEA, University of Waikato, 3 Feb 2012

2. The politics of population policy Presentation to NIDEA, University of Waikato, 3 Feb 2012 Source: http://www.nicholsoncartoons.com.au/cartoon_6593.html

3. Outline • Productivity: what is it? why is it important? • Complementarity of workers by age • Fertility, human capital, rate of discoveries • Short run effects: Relative prices of labour and capital; and the K-L ratio • A critique of public policy responses to population ageing (in Australia) Presentation to NIDEA, University of Waikato, 3 Feb 2012

4. 0 1. Productivity: What is it? (i) Individual or age-specific productivity Productivity AGE 16 45 65 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)

5. 0 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

6. 0 Why is productivity important? C/N: living standards L/N: employment to population ratio or ‘support ratio’. C/Y: consumption share of GDP Y/L: average labour productivity Presentation to NIDEA, University of Waikato, 3 Feb 2012

7. 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 0 How does population ageing affect C/N ? ? Presentation to NIDEA, University of Waikato, 3 Feb 2012

8. 0 Working age population share Presentation to NIDEA, University of Waikato, 3 Feb 2012 Source: Guest (2007)

9. 0 Labour participation adj.for age-specific productivity Presentation to NIDEA, University of Waikato, 3 Feb 2012 Source: Guest (2007)

10. 0 Impact of ageing on Y/L

11. 0 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

12. 0 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

13. 0 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

14. 0 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

15. 0 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

16. 0 Source: Guest (2007) Presentation to NIDEA, University of Waikato, 3 Feb 2012

17. 0 …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. By the way: ageing effects C/Y positively – the ‘Solow effect’. But estimates are small – about 5% over 40 years.

18. 0 5. Policy responses to population ageing • 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

19. 0 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

20. 0 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

21. 0 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

22. 0 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

23. 0 Immigration Source: http://www.nicholsoncartoons.com.au/cartoon_6593.html Presentation to NIDEA, University of Waikato, 3 Feb 2012

24. 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

25. ave pop age annual incr in immigration 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

26. 0 Policy scorecard Presentation to NIDEA, University of Waikato, 3 Feb 2012

27. 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

28. 0 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

29. 0 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

30. 0 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

31. 0 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 pre-funding of aged care Presentation to NIDEA, University of Waikato, 3 Feb 2012

32. 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. 22 Presentation to NIDEA, University of Waikato, 3 Feb 2012

33. Thanks - nice to be with you Presentation to NIDEA, University of Waikato, 3 Feb 2012