Abstract
This Selected Issues paper analyzes the effect of international migration on unemployment in New Zealand. The empirical results in this paper suggest that net migration inflows give rise to a fall in the unemployment rate. The paper estimates a system of equations including the unemployment rate, real wage, net migration rate, and labor force participation rate, taking into account the interdependence of the variables. It also examines the impact of exchange rate volatility on export firms’ decisions to hedge foreign exchange exposure.
III. How to Keep Living Standards in New Zealand Rising as the Population Ages?22
A. Introduction
1. Population aging poses a number of challenges to New Zealand’s economy. As the population ages, there will be relatively fewer people available for the production of goods and services, potentially reducing the rate of growth of GDP per person (Figure III.1). An aging population will also increase government expenditure on pensions and healthcare (see, e.g., Creedy and Scobie, 2005), and the demographic shift might also affect savings and investment. While New Zealand’s demographic profile may be more favorable than most developed economies (Figures III.2 and III.3), the country faces the twin challenge of dealing with an aging population and of closing the GDP per capita gap with the rest of the OECD.
People Aged 65 and Above
(In percent of total population)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: Statistics New Zealand.People Aged 65 and Above
(In percent of total population)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: Statistics New Zealand.People Aged 65 and Above
(In percent of total population)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: Statistics New Zealand.
Increase in the Retirement Age Necessary to Maintain the Ratio of Workforce to Population in 2050 at its 2000 Level
(In years)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: Staff estimate (World Economic Outlook, September 2004).Increase in the Retirement Age Necessary to Maintain the Ratio of Workforce to Population in 2050 at its 2000 Level
(In years)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: Staff estimate (World Economic Outlook, September 2004).Increase in the Retirement Age Necessary to Maintain the Ratio of Workforce to Population in 2050 at its 2000 Level
(In years)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: Staff estimate (World Economic Outlook, September 2004).
Necessary Increase in the Labor Participation Rate
(percentage point change)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: Staff estimate (World Economic Outlook, September 2004).Necessary Increase in the Labor Participation Rate
(percentage point change)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: Staff estimate (World Economic Outlook, September 2004).Necessary Increase in the Labor Participation Rate
(percentage point change)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: Staff estimate (World Economic Outlook, September 2004).2. Using a Cobb-Douglas production function, the GDP per capita of a country is given by:
GDP per capita=Labor Productivity* Labor Utilization,
where: Labor Productivity=Total Factor Productivity*(Stock of Capital per Hour Worked)α,
and Labor Utilization = Share of Population of Working Age* Participation Rate* (1-Unemployment rate)*Average Hours Worked per Employed Worker.
The above equation summarizes the determinants of GDP per capita, and various versions of this equation have been used to simulate the impact of population aging on GDP per capita (e.g., Cheng, 2003).
3. This chapter argues that strong GDP growth would help manage the challenge posed by population aging. Productivity and the various components of labor input (working age population, labor participation, unemployment, and the average hours worked per person in employment) determine a country’s living standards. This chapter studies these determinants as population ages, and reaches the following conclusions:
Population aging might affect productivity, but the direction is unclear. In any event, New Zealand’s productivity is low by OECD standards and boosting productivity should therefore play a key role in raising GDP per person as the country’s population ages. Increasing investment (for example by improving infrastructure), investing in education and promoting research and development might contribute to enhancing productivity.
Labor input is high in New Zealand compared to other developed nations. But people might desire to increase leisure and work less as the country grows richer. To keep labor input high, the focus should therefore be on identifying impediments that prevent people from working. For example, providing better childcare might give some women who would like to combine family life and work the opportunity to do so. Better education would help young people entering the workforce and also aid workers seeking to upgrade skills during their career. Better healthcare for older workers might allow them to remain in the workforce longer, and giving these workers more flexibility over their retirement age might also induce some to retire later, especially as life expectancy increases. Immigration, however, is unlikely to make a large difference in solving the impact of aging on the labor force.
4. The rest of the chapter studies each determinant of a country’s living standards, and discusses ways to improve it as population ages. The next section discusses productivity.
B. Productivity
5. Productivity is a key determinant of a country’s GDP per capita. Boosting productivity could therefore play a central role in handling the aging challenge.
6. New Zealand’s productivity is relatively low. As Figure III.4 shows, New Zealand’s output per hour worked is significantly lower than OECD average. Moreover, productivity growth has been lower than the OECD median in recent years (Ministry of Economic Development, 2005). To improve its productivity, New Zealand will need to increase its capital stock (capital deepening), as well as enhance its total factor productivity.
GDP per Hour Worked (2003)
(As a percent of the United States)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD estimates, December 2004.GDP per Hour Worked (2003)
(As a percent of the United States)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD estimates, December 2004.GDP per Hour Worked (2003)
(As a percent of the United States)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD estimates, December 2004.7. Aging might affect productivity through its impact on capital deepening and total factor productivity, but the net impact is unclear.
Aging might affect capital deepening, but the direction is uncertain. The life cycle model predicts that older people tend to save less than younger ones, reducing national savings, which might lower investment if foreign savings do not fully compensate for the fall in domestic savings. Also, saving and investment might suffer if taxes were raised to fund growing pension and healthcare spending. On the other hand, a decline in working age population initially increases the stock of capital available per worker. Scarcer labor also provides an incentive to substitute capital for labor. This is essentially the opposite of the situation through the 1990’s and early 2000’s in New Zealand, when low wages relative to the cost of capital contributed to the substitution of labor for capital and New Zealand’s relatively low unemployment rate.
Aging could also affect total factor productivity. Romer (1990) argues that aging might boost innovation because it puts a larger premium on innovation as labor becomes scarce. An older workforce should also be more experienced, which might increase average productivity. But aging might be detrimental to productivity if older people turn out to be less dynamic and less innovative than younger ones. Higher taxes might lower the incentive to innovate as well.
Overall, there is no clear evidence yet on the net impact of aging on productivity (see Bryant 2003 for a survey of the academic literature). Romer (1990), and Little and Triest (2002) find that decreases in the growth rate of the working age population in the United States seem to induce an increase in productivity. But other studies conducted on a panel of countries do not find evidence that demographic changes affect productivity (Brander and Dowrick 1994, Bloom and Williamson 1998). Moreover, the aging issue now faced by developed nations is unprecedented, and it is therefore difficult to know how it will affect productivity.
C. Labor Input
8. Increasing labor input increases a country’s GDP. Labor input is a function of four components: labor participation (the share of the working age population that are in the labor force); unemployment; the average hours worked per person in employment; and the working age population. Improvement in any of these components would raise GDP. People might decide to work less as the country grows richer, however. To keep labor input high, the focus would have to be on identifying impediments that prevent people from working more when they wish to do so.
9. New Zealand’s overall participation rate is high, but there may be impediments to participating for some categories of workers.
Average labor participation rate in New Zealand has grown in recent decades (Figure III.3) and is among the highest in the OECD (Figure III.5).
But participation of women is relatively low compared with countries with the highest rates of female participation such as Canada or Scandinavian nations, particularly in the 25 to 45 age group (Figures III.6 and III.8). Participation is of course significantly lower among older people (both male and female) than in the rest of population (Figures III.6 to III.9), although there has been a substantial increase in the participation of 60–64 year olds in the last decade, as people have responded to an increase in the age of eligibility for New Zealand superannuation.
Reducing obstacles to work might increase participation. While lower participation may reflect the choice of some people not to work, obstacles to joining the workforce might also play a role. For example, limited provision of public childcare may contribute to lower participation of women aged 25 to 45, as argued by Bryant et al. (2004). Also, better health care might give older workers the opportunity to remain in the workforce if they so desire. In many countries, poor health often leads to early retirement or repeated sick leaves. For example, a recent Australian report (Treasury, 2004) stresses that 30 percent of 50 to 65 year olds who retire in Australia do so because of illness or disability. There is evidence that participation also increases significantly with the level of education. Raising the level of education might give some people who would like to work, the opportunity to do so. Finally, fiscal policy has implications for participation. Higher taxes on labor income can discourage paid work (Prescott, 2003, Nickell 2003). Moreover, workers whose skills are in high demand internationally might choose to relocate to countries with more favorable tax rates.
Average Labor Participation Rate for Men and Women Aged 15-64 (2003)
(In percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Average Labor Participation Rate for Men and Women Aged 15-64 (2003)
(In percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Average Labor Participation Rate for Men and Women Aged 15-64 (2003)
(In percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.
Labor Participation Rate in New Zealand: Females
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Labor Participation Rate in New Zealand: Females
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Labor Participation Rate in New Zealand: Females
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.
Labor Participation Rate in New Zealand: Males
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Labor Participation Rate in New Zealand: Males
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Labor Participation Rate in New Zealand: Males
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.
Gaps in Female Labor Force Participation Rates
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Gaps in Female Labor Force Participation Rates
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Gaps in Female Labor Force Participation Rates
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.
Gaps in Male Labor Force Participation Rates
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Gaps in Male Labor Force Participation Rates
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Gaps in Male Labor Force Participation Rates
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.10. Unemployment in New Zealand is low, but could be even lower among young people. The unemployment rate in New Zealand, at under 4 percent, is the lowest in the OECD. However, unemployment for both males and females below 30 is significantly higher than the national average (Figures III.10 and III.11). Here again, education (including vocational training) could play a role in supplying young people with the skills they need to enter the workforce.
Unemployment by Age Groups in New Zealand—Females
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Unemployment by Age Groups in New Zealand—Females
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Unemployment by Age Groups in New Zealand—Females
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.
Unemployment by Age Groups in New Zealand—Males
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Unemployment by Age Groups in New Zealand—Males
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Unemployment by Age Groups in New Zealand—Males
(2003, in percent)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.11. Average annual hours worked per person in employment are high in New Zealand (Figure III.12), but might decline in the future to the extent that leisure is a normal good. Such pressure already materialized recently, when the country decided to shift from 3 to 4 weeks of paid leave under the Holidays Act 2004. As New Zealand catches up with the richest countries, some people might choose to work even fewer hours. This will make giving people who want to work longer hours the opportunity to do so even more important if the country is to maintain high growth rates.
Average Annual Hours Worked per Person in Employment (2003)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Average Annual Hours Worked per Person in Employment (2003)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.Average Annual Hours Worked per Person in Employment (2003)
Citation: IMF Staff Country Reports 2005, 153; 10.5089/9781451830309.002.A003
Source: OECD Labor Market Data.12. The effective retirement age could increase as gains in life expectancy continue. Life expectancy has risen significantly in recent years (in 2001, life expectancy at age 65 was about 18 years for men and 22 for women, against about 13 and 17 respectively in the early 1960s). Life expectancy is expected to further increase by several years in the decades to come (Bryant, 2003). As workers become healthier at a given age, some might consider retiring later. New Zealand’s current pension system does not deter later retirement, as the net pension payment does not decline if a person has other income.
13. Immigration is unlikely to increase the share of working age population much. While migrants tend to be younger than existing population, higher immigration will probably not have a large impact on the country’s age structure. First, many migrants also belong to older age groups. And second, those who do not, will eventually age. Immigration therefore changes the size of a country’s population rather than its structure (Bryant 2003, United Nations 2000). As a consequence, immigration does not seem very helpful in solving the aging problem.
References
Australia Treasury, 2003, Sustaining Growth in Australia’s Living Standards, (Commonwealth Treasury), 2003–04 Budget Papers, Statement 4.
Australia Treasury, 2004, Australia’s Demographic Challenges (Canberra).
Bloom, D., and G. Williamson, 1998, “Demographic Transitions and Economic Miracles in Emerging Asia,” World Bank Economic Review, Vol. 12 (3), pp. 419–56.
Brander, J., and S. Dowrick, 1994, “The Role of Fertility and Population in Economic Growth: Empirical Results from Aggregate Cross-national Data,” Journal of Population Economics, Vol. 7, pp. 1–25.
Bryant, J., 2003, “The Ageing of the New Zealand Population, 1881-2051,” New Zealand Treasury Working Paper Number 03/27.
Bryant, J., V. Jacobsen, M. Bell, and D. Garrett, 2004, “The Labour Force Participation and GDP in New Zealand” New Zealand Treasury Working Paper Number 04/07.
Cheng, K., 2003, “Economic Implications of China’s Demographics in the 21st Century,” IMF Working Paper 03/29 (Washington: International Monetary Fund).
Creedy, J., and G. Scobie, 2005, “Population Ageing and Social Expenditure in New Zealand,” The Australian Economic Review, Vol. 38 (1), pp. 19-39.
Little, J., and R. Triest, 2002, “The Impact of Demographic Change on U.S. Labor Markets,” in Seismic Shifts: The Economic Impact of Demographic Change (Boston: Federal Reserve Bank of Boston).
Prescott, E., 2003, “Why do Americans Work So Much More Than Europeans?,” Federal Reserve Bank of Minneapolis Research Department Staff Report 321, November 2003 (Minneapolis: Federal Reserve Bank of Minneapolis).
Romer, P., 1990, “Capital, Labor, and Productivity,” Brookings Papers on Economic Activity, Brookings Institution.
International Monetary Fund, 2004, World Economic Outlook, September 2004: How will the Demographic Change Affect the Global Economy, World Economic and Financial Surveys (Washington).
New Zealand Ministry of Economic Development, 2003 and 2005, Growth and Innovation Framework, Benchmark Indicators Report, (Wellington).
Nickell, S., 2003, “Employment and Taxes,” paper prepared for the CESifo conference on “Tax Policy and Employment”, July 2003.
United Nations, Mimeo, Population Division, Department of Economic and Social Affairs, United Nations Secretariat, 2000, Replacement Migration: Is It a Solution to Declining and Ageing Populations? (New York).
Prepared by Benoit Mercereau.
