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LONG-TERM FISCAL PROJECTIONS UNDER
ALTERNATIVE LABOUR FORCE SCENARIOS
PETER GARDINER, MATTHEW BELL & PAUL RODWAY
© The Treasury
The usual disclaimer...
The views, opinions, findings and conclusions or recommendations
expressed in this paper are strictly those of the authors. They do not
necessarily reflect the views of the NZ Treasury or the New Zealand
Government. The New Zealand Treasury take no responsibility for
any errors or omissions in, or for the correctness of, the information
contained in this paper. The paper is presented not as policy, but with
the view to inform and stimulate wider debate.
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© The Treasury
Overview
• Motivation
– Long-term fiscal strategy
– Growth assumptions
•
•
•
•
•
3
Labour force participation
Hours worked
Labour productivity
Fiscal and revenue projections
Discussion - limitations and future work
© The Treasury
Motivation – Treasury’s LongTerm Fiscal Strategy
• Accompanying the yearly budget, Fiscal Strategy Report
provides a further 10 years of fiscal projections that
provide key indicators like net debt and operating balance
• In 2006 and again in 2009 produced longer term
projections (Long Term Fiscal Statement) to 40-50 years
• Highlight the implications of demographic change, namely
population ageing
• The Treasury are in the early stages of planning the LTFS
that is scheduled to be released in early 2013
• This work was undertaken to inform the LTFS
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© The Treasury
Motivation – FTFS & LTFM
•
•
•
Long-term fiscal projections aren’t forecasts (although they are follow from the
Treasury forecasts)
They are based on a set of aggregate-level assumptions and do not
incorporate any policy responses.
However, they do portray potential paths for important fiscal indicators under
current or planned policy settings
Key assumptions that under underpin LTFM
Future participation rates based on Statistics NZ’s population
projections
Hours worked and labour productivity (and inflation) projections
are based on their respective historical averages
%
2.0
Projections
1.5
1.0
0.5
We are explicit about the impact that an ageing population
will have in these key labour market assumptions – ie that it
will cause a fall in labour force participation, but will not alter
hours worked or labour productivity
5
0.0
-0.5
-1.0
-1.5
Labour force participation
hours worked
This work looks at how to incorporate ageing effects more broadly...
labour productivity
Year ending 30 June
© The Treasury
Labour force projections
•
70
69
68
67
66
•
65
64
63
62
61
•
60
Mar-86
Mar-87
Mar-88
Mar-89
Mar-90
Mar-91
Mar-92
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
59
Participation rate
Trend (lamda=1600)
80
•
70
60
50
40
30
20
10
0
1880
•
1900
1920
1940
child
6
1960
1980
Aged
2000
2020
2040
Prime age
2060
Based on Statistics New Zealand’s Series 5
projection
From which the Treasury derives a projected
working age population (15+).
Using the SNZ census-based labour force
projections as a base the Treasury derive five-year
age group labour force participation rate
projections
These are blended with aggregate level
participation rate forecasts from Treasury’s
macroeconomic forecasts to capture initial
business cycle effects
Age group participation measures to drive forward
the projections for 40 years.
© The Treasury
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Male
Female
Male
Female
55-64 yrs
80.0
80.0
60.0
60.0
70.0
40.0
40.0
60.0
20.0
20.0
50.0
0.0
0.0
Male
Jan-34
Jan-30
Jan-26
Jan-22
Jan-18
Jan-14
Jan-46
Jan-50
Jan-54
Jan-58
Jan-46
Jan-50
Jan-54
Jan-58
Jan-42
80.0
Jan-38
65+ yrs
Jan-42
90.0
Female
Jan-38
100.0
Jan-34
Male
Jan-30
100.0
Jan-26
100.0
Jan-22
Female
Jan-18
50.0
Jan-10
25-34 yrs
Jan-14
50.0
Jan-06
50.0
Jan-10
60.0
Jan-02
70.0
60.0
Jan-06
70.0
60.0
Jan-98
70.0
Jan-02
80.0
Jan-94
80.0
Jan-98
90.0
80.0
Jan-90
100.0
90.0
Jan-94
Jan-86
100.0
90.0
Jan-90
Jan-58
Jan-54
Jan-50
Jan-46
Jan-42
Jan-38
Jan-34
Jan-30
Jan-26
Jan-22
Jan-18
100.0
Jan-86
Jan-31
Jan-28
Jan-25
Jan-22
Jan-19
Jan-16
Male
Jan-13
Jan-10
Female
Jan-07
Jan-14
Jan-10
Jan-06
Jan-02
Jan-98
Jan-94
Jan-90
Jan-86
Jan-58
Jan-54
Jan-50
Jan-46
Jan-42
Jan-38
Jan-34
Jan-30
Jan-26
Jan-22
Jan-18
Jan-14
Jan-10
Jan-06
Jan-02
Jan-98
Jan-94
Jan-90
Jan-86
15-24 yrs
Jan-04
45-54 yrs
Jan-01
Jan-98
Jan-95
Jan-92
Jan-89
Jan-86
Jan-58
Jan-54
Jan-50
Jan-46
Jan-42
Jan-38
Jan-34
Male
Jan-30
Jan-26
Jan-22
Jan-18
Jan-14
Jan-10
Jan-06
Jan-02
Jan-98
Jan-94
Jan-90
Jan-86
Labour force projections
Labour force participation rates by age group, male and female...
35-44 yrs
Female
© The Treasury
Labour force projections
•
The total labour force participation rate can be broke into a component due to the working age
population structure and a component reflecting the participation performance within each age group
as follows:
Structure component
8
+
Performance component
© The Treasury
Average Hours Worked
38.0
37.0
Until recently, hours worked has
been reasonably stable...
36.0
35.0
34.0
33.0
32.0
31.0
30.0
Mar-10
Mar-08
Mar-06
Mar-04
Mar-02
Mar-00
Mar-98
Mar-96
Mar-94
Mar-92
Mar-90
Mar-88
Mar-86
29.0
Age group profile highlights gender
differences and lower hours worked
among youth and older workers
45
45
40
40
hours per week
hours per week
1980s
35
30
25
2000s
35
30
25
1980s
1990s
2000s
20
20
15-24
9
1990s
25-34
35-44
45-54
55-64
65+
15-24
25-34
35-44
45-54
55-64
65+
© The Treasury
Projecting age-augmented hours
worked
(weighted average total that accounts for changes in population structure)
𝐴𝐻𝑊𝑡 =
𝑊𝐴𝑃 𝑘,𝑔,𝑡
𝑘,𝑔 ( 𝑊𝐴𝑃 )𝐴𝐻𝑊𝑘,𝑔
𝑡
Where k is the age group, g is gender and WAP is the working age population.
With no projected employment by
age group, working age population
projections are used as a proxy,
while average hours worked by
age group and sex are based on
historical averages.
Projected Average hours worked: base and
adjusted by age
weekly
34.50
34.00
33.50
33.00
32.50
provides an approximation of
average hour worked that
accounts for changes in the
projected population structure.
10
32.00
31.50
Base
Age adjusted
Year ending 30 June
© The Treasury
Labour productivity
•
•
•
Little NZ based analysis that has looked at the impact of NZ’s ageing
population on productivity...
Internationally seems be a general acceptance that on some level ageing is
correlated with declining productivity - largely based on health science studies
that report a decline in non-cognitive skills with age among individuals.
Although opponents argue that it is difficult to link to productivity and ageing
because:
there’s no strong evidence that demonstrates that cognitive skills decline with age
and that worker productivity depends on many factors including the extent to which
cognitive skills are relevant to specific jobs
– Furthermore others argue that population ageing causes shifts in both labour
supply and demand for goods and services, for which the outcome, in terms of
economy-wide productivity, is indeterminate.
–
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© The Treasury
Labour productivity
• The question whether it’s reasonable to assume that ageing and
productivity are linked is aptly summarised in “Economic Implications
of an Ageing Australia” by the Australian Productivity Commission
(2005). It suggests that differences in assumed projected growth rates
arise from two sources:
– Different views about the effects of ageing on productivity
– Different views about economy-wide productivity changes that are not directly
linked to ageing
• General approach is to use wage distributions to approximate
productivity differences across age groups and to adjust for changes
in population structure to capture ageing effects on labour productivity
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© The Treasury
Projecting age-augmented labour
productivity
•
Mincer wage equations is estimated to approximate relative differences in labour
productivity across age groups and gender, controlling for education and year.
𝑅𝑒𝑎𝑙 𝑊𝑎𝑔𝑒𝑡 = 𝛼 + β1 𝑘. 𝑔 + β2 (edu) + β3 (t) + et
18.0
Depends on link
between growth in real
wages and labour
productivity...
16.0
14.0
12.0
10.0
8.0
...Some NZ evidence
supports this
6.0
4.0
2.0
0.0
15-24
25-34
35-44
Male
13
45-54
55-64
65+
Female
© The Treasury
Projecting age-augmented labour
productivity
•
Wage profiles are used to derive relative productivity differences by age and
gender weighted by working age population to average labour productivity
growth of 1.5%.
𝐿𝑃𝑡 =
𝑊𝐴𝑃 𝑘,𝑔,𝑡
𝑘,𝑔 ( 𝑊𝐴𝑃 ) 𝐿𝑃𝑘,𝑔
Growth (%)
Labour productivity
projections don’t account for
changes to age group
productivity...
1.6
1.5
1.4
1.3
... rather they reflects
changes in the structure of
the population
1.2
1.1
1.0
Base
14
Alternative
Year ending 30 June
© The Treasury
Fiscal and revenue projections
•
Central to the Treasury’s projections are estimates of both real GDP and
nominal GDP (inflation projections) – the key assumptions above drive much
of the revenue and expenditure projections
•
The Treasury restricts current policy effects to just the five-year forecast
horizon and then require policy to be “neutral.”
•
The net result of modelling projections is best summarized by four key fiscal
indicators:
–
–
–
–
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Core Crown Revenue (%GDP):
Core Crown Expenses, excluding finance costs (%GDP):
Core Crown Debt (%GDP):
Total Crown OBEGAL (%GDP): Operating Balance excluding Gains and Losses
© The Treasury
Fiscal and revenue projections
Projection assumptions:
PREFU 2011 base and two alternative age-augmented:
•Labour productivity only
•Labour productivity and hours worked
%
%
2.0
3.5
3.0
1.5
2.5
1.0
2.0
0.5
1.5
0.0
1.0
0.5
-0.5
0.0
-1.0
-0.5
Labour force participation
hours worked
labour productivity
base hours worked
base labour prod
-1.5
Year ending 30 June
16
Base
Alternative
-1.0
Year ending 30 June
© The Treasury
Fiscal and revenue projections
% GDP
% GDP
Core Crown Revenue to GDP
35%
35%
34%
34%
33%
33%
32%
32%
31%
31%
30%
30%
29%
29%
Core Crown Expenses excl. debt-financing costs to GDP
28%
28%
Actual & Forecast
Actual & Forecast
Projection
Projection
27%
27%
PREFU 2011 LTFM Historic Trends
PREFU with age-adjusted labour productivity growth
PREFU with age-adj l.p. growth & avg hrs wk
% GDP
PREFU 2011 LTFM Historic Trends
PREFU with age-adjusted labour productivity growth
PREFU with age-adj l.p. growth & avg hrs wk
Year ending 30 June
% GDP
Total Crown OBEGAL to GDP
6%
Year ending 30 June
Core Crown Net Debt (excl. NZS Fund and advances) to GDP
110%
Actual & Forecast
Projection
100%
4%
90%
2%
80%
Actual & Forecast
Projection
70%
0%
60%
-2%
50%
-4%
40%
30%
-6%
20%
-8%
10%
-10%
0%
PREFU 2011 LTFM Historic Trends
PREFU with age-adjusted labour productivity growth
PREFU with age-adj l.p. growth & avg hrs wk
17
Year ending 30 June
PREFU 2011 LTFM Historic Trends
PREFU with age-adjusted labour productivity growth
PREFU with age-adj l.p. growth & avg hrs wk
Year ending 30 June
© The Treasury
Fiscal and revenue projections
Primary balance (%GDP)
% GDP
4%
Actual & Forecast
Projection
3%
2%
1%
0%
• primary balance; (Core crown
revenue - investment income)
less (expenditure – debtfinancing costs),
-1%
-2%
-3%
-4%
-5%
-6%
-7%
PREFU 2011 LTFM Historic Trends
PREFU with age-adjusted labour productivity growth
PREFU with age-adj l.p. growth & avg hrs wk
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Year ending 30 June
• shows a more modest decline
compared to the OBEGAL
projection
© The Treasury
Discussion, limitations and future
work
• This exercise has been useful in underlining a number of factors that
should be addressed if we are to incorporate wider population ageing
effects when modeling the impact of population ageing on fiscal
projections.
• It highlights that the main channel of future population ageing occurs
through labour force participation
• And that while the impact on hours worked and labour productivity
may be modest - they do have fiscal implications that could be
important to incorporate more formally in the Treasury’s LTFM
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© The Treasury
Discussion, limitations and future
work
• Several methodological and data issues need to be resolved,
including:
– Labour force projections: Independent labour force projections are
needed to generate more realistic participation rates beyond the initial 20
year projection horizon. Because of the way that age group labour force
estimates are projected the decline in the aggregate projected labour force
participation rate may be overstated.
– Employment: Labour force projections should disaggregated employment
– 65+ age group: Age groups could be extended to 65-69 and 70+ to better
and more accurately account for the changes in labour force participation
that that are occurring among the older age groups.
– LTFM: While labor productivity is incorporated in the LTFM, this exercise
has highlighted that more thought could needed to better accounting for
hours worked in the model.
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© The Treasury
Discussion, limitations and future
work
• This work has also highlights some deficiencies in the adopted
approach.
– The approach accounts for structural changes in New Zealand’s population
including in participation.
– Supply-side methodology that doesn’t include likely feedback loops. For example,
doesn’t account for changes in demand for goods and services, or account for
changes to age group hours worked or labour productivity that may be the
consequence of population ageing
•
•
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On a positive note, Statistics NZ recently published experimental stochastic
population projections for New Zealand (See Dunstan, 2011). This
methodology could be a useful innovation that may resolve some of the issues
identified above, if extended to age groups and labour force projections, and
would also provide measures of uncertainty
Given existing data limitations, this methodology is unlikely to be adopted in
the main LTFM projections, although it could be presented as part of the
alternative scenarios that accompany the central projections
© The Treasury
Thank you...
• Questions?
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© The Treasury