Labour market participation falling.

Changes in labour force participation may reflect cyclical changes related to the economic cycle, or structural changes such as demographic trends.  The part rate was on a structural upward trend until late 2010.  This essentially reflected two factors: (i) increased participation by women in the workforce; and (ii) an increase in participation of people aged 55 and over (i.e. workers delaying retirement).

The part rate has recently been falling.  Over the year to September 2013, the part rate fell by 0.5pts.  During that same period, the unemployment rate rose by just 0.3pts.  Over the year, 95k jobs were created.  The rise in the unemployment rate was capped due to the drop in labour force participation.

Currently, the biggest single influence on the part rate is the ageing of the population.  This is structural.  With an increase in longevity, there has been a consequent rise in the number of persons aged 65+ as a share of the working‑age population.  And the rate of increase has accelerated in recent years.  The 65+ cohort has a much lower participation rate.  Unless there is an offsetting increase in the part rate of other age cohorts, the aggregate part rate will naturally fall as the proportion of persons 65+ to the population rises.  They are neither working nor looking for work – they are retired.

Until recently, an increase in the part rate of persons aged 55+ in the workforce meant that the aggregate part rate was trending higher.  It more than offset an increase in the number of persons aged 65+ as a share of the working‑age population.  55+ year olds stayed in the workforce due to better healthcare and a structural shift in the composition of employment towards less manual intensive labour.  But it looks like most of that structural lift in the part rate of the “older” cohorts has now been exhausted.  And in the last year, the part rate of 60‑64 year olds has actually decreased.

Why?  Some ‘older’ workers stayed in the workforce longer than they originally intended as a result of the GFC hitting asset values and thus eroding retirement funds.  These workers who were approaching retirement were forced to delay retirement to rebuild worth and wait for a recovery in asset prices.  We are now seeing some of those workers exit the labour force due to both the recovery in equity prices and to a lesser extent, house prices.  As a result, the overall part rate of 60‑64 year olds has drifted lower.

There has also been a noticeable decrease in the part rate of younger people in recent years.  Over the past five years, the part rate of persons entering the labour market (i.e. 15‑19, and to a lesser extent 20‑24), has trended lower.  But during the last two years, the part rate of these “younger persons” fell more sharply than in the previous three years.    We suspect that this is primarily due to cyclical factors.  In general, younger people have more flexibility around career and work‑related decisions.  They are more likely to tactically change or adapt their decisions around work when conditions in the labour market change.  Tertiary education becomes more attractive to young people when the employment market is soft and thus job opportunities are more limited for school leavers.  This has been the case recently.

The third group, or the middle cohort, are those in their “prime” working age.  These are persons aged 25‑54.  Most people aged 24‑55 have finished tertiary study and are not retired or approaching retirement.  As a result, the part rate is significantly higher and less volatile for this cohort.  Over the last year, the part rate has fallen marginally for this group and this looks cyclical.  It is likely to reflect a small number of discouraged workers leaving the workforce due to a soft jobs market.  This is normal.

Demographic influences mean that the part rate has peaked and will trend lower over time as the proportion of the population over 65 increases.  In the short term, the recent trend is expected to continue.  The aggregate decrease in the part rate by structural forces is likely to be magnified by the small cyclical impact of a soft labour market.  The combination of these two factors will limit the overall rise in the unemployment rate.  We think the unemployment rate is likely to peak at around 6%

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