Can we have economic growth without a growing workforce?

Photo by Museums Victoria on Unsplash

It is very difficult to sustainably grow GDP unless the workforce is also growing at a reasonable rate. Labour force growth in OECD countries contributed one-third of the total economic growth between 1960 and 2015. Since then, many countries have entered a labour-scarce environment, with some countries like Korea, Japan, Germany and Italy already shrinking.

Working-age population past its peak

Economic growth in the developed world grew strongly from the end of WWII to the 1980s, fuelled by an increasing working-age population. Since then, the working-age population has been declining in many advanced nations.

The trend is expected to accelerate as the baby boomers reach retirement age. Despite living longer and healthier lives, the peak impact of baby boomers’ retirement is expected to hit in 2030. However, population ageing is not just caused by the ageing baby boomers, but also by the demographic transition to lower birth and death rates.

As with most of the developed world, New Zealand’s population is ageing, which will result in a slower labour force growth than in prior decades. The median age of New Zealand’s population is projected to be 40 years by the early 2030s, up from 25.6 years in 1970.

Not only will the population age, but the rate of aging is expected to increase. According to Bain & Company, the coming decade will see those aged 65 and older increasing faster than the working-age population in OECD countries for the first time in history.

Labour force growth through immigration

New Zealand has had record levels of immigration over the last decade which has turbo-charged our population growth. Higher migration levels have accounted for 30 percent of population growth since the early 1990s.

COVID-19 brought the country’s immigration system to an abrupt halt as borders were largely closed to international arrivals. Now, the government has announced an immigration “reset” and has indicated that it will review the largest residence category–the skilled migrant category. Economic and Regional Development Minister Stuart Nash advised businesses who have relied on migrant workers in the past to “come up with creative and innovative ways to attract local talent and to explore alternative ways to produce your goods and services”.

This doesn’t offer a lot of comfort for employers already struggling with labour shortages. But what about the effect of immigration on long-term economic prosperity? While migration tends to increase the proportion of working-age population, the literature for the long-term benefits or otherwise of migration is not clear-cut. The OECD economic survey in 2019 pointed to small positive effects of long-term immigration on per capita incomes. However, temporary migration, which accounts for 60 percent of migrant arrivals in New Zealand, tends to have small negative effects, particularly on low-skilled New Zealand workers.

Productivity growth through automation

According to OECD analysis, actual productivity growth rates in many regions have been lower than the growth required to maintain per capita GDP levels in recent years. A study by Bain & Company estimated that to fully offset the decline in labour force growth in the OECD productivity growth would have to be 54 percent higher than it has been from 1995–2015.

Faced with increasingly scarce labour, many companies are turning to automation to boost productivity. It’s no surprise that many of the countries with the most pressing labour shortages also have the highest adoption of robots.

Technology adoption requires access to capital, something that New Zealand’s mostly small businesses have traditionally struggled with. It also requires a population that embraces technological change. According to a 2020 report from the Productivity Commission, New Zealanders are not yet convinced that emerging technologies like robots and AI will be a good thing either for the economy or for society. This public perception may be holding business leaders back from investing more in automation, particularly if it might be at the cost of workers’ jobs.

Low productivity growth seems like an intractable problem, but it’s a problem we need to solve if we don’t want to see our standard of living slide. Unlike in past decades, it’s clear we can no longer rely on an abundant workforce. With a dramatically different labour market, automation may hold the only key to our future economic prosperity.

GDPLive is a world-first real-time GDP forecaster, which uses big data and AI to form estimates of economic activity in NZ. Go to: www.gdplive.net