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The upside of slow growth in the labour force


The Finance Department’s long-awaited study on the economic and fiscal implications of our aging population was finally released on Oct. 23. It’s a gloomy outlook that underpins the Harper government’s view that we have to cut government spending today to maintain costly social programs tomorrow.

What the report fails to look at is the positive impacts of slower growth in the labour force, namely the prospect of better jobs and higher productivity.

The paper argues, quite correctly, that this demographic trend, driven by low fertility rates and the aging of the baby boomers, will cut the future rate of economic growth per person in half unless labour force participation rises, and unless the rate of growth of labour productivity increases.There’s little argument now over the underlying demographic trends: Between now and 2030, the ratio of persons aged 65 and over to the working age population (age 15 to 64) will rise from 21 per cent to 37 per cent, and growth in the labour force will slow from 1 per cent to 0.5 per cent a year.

However, the labour force participation of seniors will likely increase at a faster rate than is projected.

The proportion of Canadians aged 65 to 69 who are still in the work force bottomed out at just over one in ten in 2000, but has since jumped to almost one in four. There are reasons to believe that the exit of the baby-boomers from the work force may be further delayed, for both negative and positive reasons.

On the negative side, with debts high and retirement savings in bad shape, many older workers will be unable to retire at age 65.

But, on a more positive note, it does seem that the baby-boomers will work longer if decent job opportunities are available. For example, more than one in three Albertans age 65 to 69 are still working, almost double the level in Nova Scotia and New Brunswick. This suggests that as and when the unemployment rate falls due to slower labour force growth, participation rates of older workers may well continue to increase.

When it comes to labour productivity – output per hour worked – the government again assumes that there will be no major change in the trend even as growth in the labour force slows. This ignores positive feedback mechanisms.

If workers become scarce and unemployment is low, wages can be expected to rise, especially in occupations where there are skills shortages. In response, employers will surely be expected to invest much more in machinery and equipment so that they can produce more with fewer employees.

And employers can also be expected to invest more to upgrade the skills of workers. They will turn to the many currently under-employed young people, recent immigrants and aboriginal Canadians to fill labour shortages in good jobs, really putting the heat on the low wage, low productivity sectors of the economy to produce more with less labour input.

Part of the reason why productivity grew so rapidly before the 1980s was that low unemployment stimulated high levels of business investment in both capital equipment and skills.

Looked at this way, population aging is a good thing. Not only are we living longer and generally healthier lives, slower labour force growth opens up the opportunity to significantly improve both productivity and the quality of jobs.

Andrew Jackson is the Senior Policy Advisor at the Broadbent Institute. This article originally appeared on the Globe & Mail's Economy Lab.