Australia's Ageing Population and Its Affects On Labour Supply

12 Nov 2013

The ageing population is reducing levels of participation in the economy. While some may view this as a serious concern for economic growth, careful analysis reveals that it may not necessarily be so.

The Reserve Bank of Australia aims to increase economic growth rate at a high pace so as to allow for a greater number of employment opportunities. But a key factor in alleviating economic growth is potential labour supply, which is being affected by the ageing population.

Most baby boomers are reaching ages of retirement and consequently leaving the workforce. The proportion of those aged 60 or over rose from 21.5 per cent to 24.5 per cent in the last decade.

Simultaneously, there has been a decrease in the participation rate in the economy. Last year the participation rate reached a seven year low of 64.9 per cent, taking 215,000 people out of the hunt for a job. Had this not been the case, the unemployment rate would be 7.3 per cent instead of the reported 5.6 per cent.

It is easy to reach the conclusion then that the increasing numbers of baby boomers approaching retirement has negatively affected labour supply. With a lesser number of people available to work, prospects for economic growth decrease, which explains the consequent focus on this segment of the population by some policymakers.

But a further analysis of the unemployment rate shows that an excessive focus on this issue may be misguided. On studying unemployment rates over the past decade, it was found that while the changing age structure has been reducing it and consequently the size of the labour pool, other factors have also played a hand. While the latter has contributed to an increase in the unemployment rate in the past, recently they have led to a decrease.

In the last year, ageing population led to a 0.3 per cent reduction in the unemployment rate but other factors shaved off 0.5 percentage points. Interestingly, these factors are strongly correlated with employment growth.

This then suggests that with the picking up of the economy in the coming years, the increasing employment opportunities will serve to encourage potential workers into the market. This would result in the participation rate not falling in line with the ageing population and may even push higher for a while.

Thus, the retirement of baby boomers may not be such a pressing issue with regards to participation rate as the economy seems to show a greater scope for growth than what is currently perceived. 

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