A new analytical note put out this week by the Reserve Bank of New Zealand explores the effect of the ageing population and the business cycle on the outlook for the labour force participation rate.
These factors, the RBNZ said, are important for understanding the level of maximum sustainable employment in the economy.
Labour force participation is influenced by a variety of structural factors. For example, an ageing population may result in a lower aggregate labour force participation rate, because older people tend to participate less.
Labour force participation is also influenced by cyclical factors. For example, a strengthening economy encourages more workers to enter the labour force.
The RBNZ found that labour force participation is mildly pro-cyclical in New Zealand. This suggests that monetary policy has a small influence on the participation rate, through an encouraged worker effect.
The participation rates of young people and people near retirement age appear the most sensitive to business cycle fluctuations.
“Our analysis suggests that the aggregate participation rate is likely to remain broadly flat out to 2035, as an ageing population offsets further increases in the participation of women and older people,” the bank said.
The bank expects the aggregate participation rate to increase further if participation by women aged 24-54 and people aged 55 and above increases at a greater pace than over the past decade.
Alternatively, if participation rates of women and older workers have peaked, an ageing population will reduce the aggregate participation rate over time.