By: Ben Franklin, Head of Economics of Ageing, ILC-UK
Stagnant productivity growth and lower migration will put greater emphasis on older workers to do the heavy economic lifting but this won’t resolve our economic malaise
By Q1 2017, economic output per worker was just 1% higher than it was in Q1 2008 – that’s just 1% in 9 years! Even starker is the difference between our current level of output per worker and what we might have expected output to be had the pre-crisis trend continued. If performance had matched expectations, output per worker would now be 17% higher or £12,000 more per worker each year (see chart). That is some productivity slowdown.
Source: ONS and author’s calculations
Whether productivity growth will remain slow over the medium to long term is largely a question for the crystal ball, but there are reasons to be pessimistic. In particular, the post war economic boom, both at home and abroad, looks to be exceptional in historical terms. Our productivity performance may simply be reverting back to the long run norm.
Source: Bank of England, Three Centuries of Economic Data and author’s calculations
How can we cope with the productivity slowdown?
Suppose for a moment that the pessimists are right and that we are in a new era of stagnant productivity growth. Such a situation would mean that we would need an increasing number of workers to offset this slowdown and thereby retain rates of growth that we were accustomed to before the financial crisis. But where are these workers going to come from? The employment rate amongst pre-state pension age adults is at a record high while as a consequence of population ageing this group will only gradually grow over the coming decades. Meanwhile, migration is set to fall in the wake of the Brexit vote so we can’t rely on this lever for growth either.
All this means there will be greater emphasis on older workers to do the heavy economic lifting. But how far do we need to go to boost the employment rates amongst the over 65s? We’ve done some rough calculations based on the assumption that productivity per worker continues to grow in line with its sluggish performance since the financial crisis, and net migration falls to around 100,000 per annum. Based on these assumptions, we constructed four scenarios:
- Employment rate amongst the over 65s remains as they are today (around 11%)
- Employment rate amongst the over 65s grows in line with the trend since 2008 (reaching 25% by 2050)
- Employment rate amongst the over 65s rises doubly as quickly and reach 50% by 2050.
- Employment rate amongst the over 65s grows to match the rest of the adult population (74% by 2050).
Our results demonstrate that the over 65s could provide a substantial economic windfall. For instance, if we assume that the employment rate amongst the over 65s rises to 50% by 2050, GDP is 18% or £560bn greater than if employment rates remain as they currently are. And if we assume the employment rate amongst the over 65s rises to 74% by 2050 (matching current employment rates amongst 16-64 year olds), GDP is 36% higher or £910bn greater than if employment remains the same.
Source: Author’s calculations based on ONS data
But older workers are no silver bullet
Despite the clear benefits of supporting higher employment rates amongst older people, the above chart shows not even the most transformative scenarios would result in output akin to what we might have expected given our post war trend. As economist Paul Krugman once said, “productivity isn’t everything, but in the long run it is almost everything”. Supporting older workers will undoubtedly help boost our national output, but unless we can solve the productivity problem, we’re still doomed to a life of toil and a little less leisure.
Head of Economics of Ageing, ILC-UK