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Cullen Address on Labour Force Participation

Michael Cullen Address Workshop on “Labour Force Participation and Economic Growth” Hotel Intercontinental, Wellington

It is my pleasure to welcome you to this workshop on labour force participation and economic growth.

The link between labour force participation and economic growth has for a long time intrigued economists and policy makers. That is in part because what seems on the surface to be a fairly simple relationship turns out to be a lot more complex.

High rates of labour force participation are, both intuitively and empirically, associated with periods of economic growth; but this tells us little about how the causal relationship operates, how strong it is, what other factors are significant and (the question politicians always want answered) what levers are effective in making both happen simultaneously.

The challenge is a familiar one, of course. We focus on what can be easily measured as proxies for the more elusive social and economic forces that lie behind the figures.

This is undoubtedly a good time to be examining labour force participation and economic growth, since, in the last five years, New Zealand has enjoyed a good deal of both.

The last quarter of 2004 saw the participation rate rise to 67.7 per cent, and unemployment fall to 3.6 per cent. These are record levels in the 19 year history of the Household Labour Force Survey, and we now have the lowest unemployment rate of OECD nations with comparable data. Indeed employment has increased 264,000 (14.7 percent) since the start of 2000. The low unemployment rate means that we are getting close to pushing the boundaries of the current workforce. There are skills shortages in some areas and firms are finding it difficult to find staff. At the same time, we cannot simply ask people to work harder. New Zealanders already work longer hours than most of the rest of the OECD.

Meanwhile, the economy has grown almost 20 per cent in the last five years, outstripping the prevailing growth rates within the OECD, and exceeding that of our major trading partners such as Australia, Japan and the US.

GDP growth in the year to last December coming in at 4.8 percent, which is a remarkable show of resilience in an economy with some obvious areas of weakness.

It is not clear how long this happy convergence will continue. What is clear is that perpetuating it over the long term requires a third factor, namely growth in labour productivity.

As important as growth in labour force participation may be in the short term, there are few examples if any in economic history of changes in labour force participation driving long term economic growth. Such examples would imply bringing into the workforce segments of the population who have been at leisure or whose capacity has been underutilised. About the only example in recent history in the developed economies was the significant increase in female labour force participation that took place over the course of last quarter of the twentieth century.

Conversely, we should not forget that some of the important advances in social wellbeing have involved reducing the need for labour force participation amongst those whom society wishes to protect: notably, the abolition of child labour, the development of the state pension and the welfare system more broadly.

There is little argument that the long term drivers of economic growth relate to growth in productivity, through such factors as:

Harnessing new natural resources, such as breaking in new land;

Building better infrastructure, especially transport and communications;

Adopting new technologies for production; and

Increasing average skills levels.

These forces, in tandem with strong labour force participation, are what drive economic growth. But how that ‘in tandem’ works in practice is what is both interesting and important.

The 2001 census showed that there were about 550,000 people aged 15-64 who were not in the labour force. This appears to be a significant pool of potential workers. In fact, New Zealand does better than most OECD countries in overall participation. Participation rates for older workers are high compared with the rest of the OECD. But the participation of young women is markedly low compared with the rest of the OECD.

What we must acknowledge is that, outside of a war economy where it is feasible to require all able-bodied people to report to their local munitions factor, labour force participation is the end product of a series of choices made by individuals within families.

Work provides for our financial needs and, as is often overlooked, also a raft of social and personal needs. It is the primary means by which economic growth is distributed through the community. And it is also one of the primary spheres in which people experience social inclusion, by which, in the noted phrase from the 1972 Royal Commission on Social Security, they gain a sense of “participating and belonging” in New Zealand society.

Already, then, there are at least two impulses behind decisions to participate in the labour force.

Conversely, there are various reasons not to participate in the work force, engaging in education, raising children, caring for older family members, and so on.

What this means is that before approaching any normative views about labour force participation, about who participates, when and how much, it is important to understand how these tradeoffs and choices are made. That does not mean that there are no norms. I am from a political tradition that is strongly pro-labour, both in the sense of supporting the rights of working people and also in the sense of promoting widespread participation in the labour force (what we used to call full employment) as the means of giving everyone a stake in the economic future of the nation.

My point is rather than we need to proceed carefully before attempting to shoehorn people into a pattern of labour force participation that clashes with their other goals and aspirations.

For this reason my government has focused on policies that expand the choices and opportunities that individuals face. That involves three things:

First, it means increasing productivity at an individual level through better quality and better targeted education, including industry training where we have made great strides in the past five years. More skilled workers have expanded choices and can better shape their labour force participation to suit their needs.

Second, it means increasing productivity at a broader level. For example, many of our investments in infrastructure will have a progressive impact upon labour force participation. Building more efficient transport systems widens the scope of jobs available to, for example, people living in outlying suburbs of Auckland who have faced significant obstacles accessing work. Similarly, our investment in the roll out of broadband internet in remote rural areas will make newly labour force options available to those communities, including expanded opportunities for self employment.

And third it means removing barriers to labour force participation. Our substantial investment in childcare and early childhood education is a good example. It will mean greatly expanded options for the new generation of parents

One of the links between productivity and participation is the fact that advances in productivity can spawn opportunities to ‘unlock’ the contribution of potentially productive workers who have for a variety of reasons been inhibited from entering the workforce. There are two groups worthy of closer consideration: women with school age children, and people living with health problems or disabilities that impair but by no means remove their ability to engage in paid work. I would like to focus for a moment on these two groups.

The OECD has suggested that the participation of young women is significantly below that of other OECD countries and that increasing their participation could contribute to increasing economic growth.

In New Zealand, women’s labour force participation rates are lower than men’s at all ages. They show a characteristic “dip” in between the ages of 25 and 34.

The dip is also seen in the UK, US, and Australia, but not in most other OECD countries. It explains why participation rates of young women are low compared with the rest of the OECD. On the other hand, New Zealand women aged 45 years and over have strong rates of participation compared with older women in other countries.

The care of young children are the most important factor affecting women’s labour force participation. New Zealand women tend to leave paid work when they have children. Just over half of mothers with a child under 5 participate in the labour force. Fewer than half of them work full-time.

But mothers return to paid work as their children get older. Eighty per cent of mothers of school-aged children are participating in the labour force. This is very similar to the participation rate of women with no children.

Sole mothers are less likely to participate in the labour force than partnered mothers. New Zealand stands out amongst other OECD countries for the low participation of solo mothers, together with a high prevalence of sole parent families.

This government is committed to ensuring that the parents of young children have as broad a range of options as possible for their workforce participation.

In a general sense, education is an important factor in broadening those choices and influencing women’s labour force participation. Women with no school qualifications are the most likely to be out of the labour force.

So too, employment conditions need to be supportive of working parents. Many employers have seen for themselves the benefits of providing flexible working hours and family leave. The work-life balance initiative in the Department of Labour is leading the way in demonstrating the value of flexible work for both employers and workers. Flexible working arrangements allow workers more choice and control over their working lives. Many employers are finding that flexible work arrangements help them to attract and keep skilled staff and increase their productivity. As the labour market gets ever-tighter, firms will need to sustain people-friendly policies to attract and retain skilled workers.

Some of this government’s initiatives in employment regulation, such as parental leave provisions, have been aimed at the same objective. Parental leave is an important way to promote the well-being of both mothers and babies. It can help mothers to return to the workforce by retaining attachment to their jobs. That is why this government introduced paid parental leave during our first term in office. We are now extending that to 14 weeks and expanding eligibility.

The Prime Minister has recently foreshadowed further initiatives to reduce the barriers to workforce participation among parents of young children who want to maintain their careers.

Increasing access to childcare is one of the measures aimed at allowing parents of young children more choice about entering paid work. We are starting from a low base, as public expenditure on childcare and early childhood education is currently amongst the lowest in the OECD. Expanded programmes for after-school care will help parents of school-aged children into full-time work.

The important thing about childcare is that it must be of high quality, and the government’s emphasis on ensuring high quality in early child education will help to allow parents to make childcare arrangements with confidence. We are also increasing the number of early childhood teachers to meet the expected increase in demand.

Turning to the second group of people I mentioned before, one of the key trends in benefit numbers in recent years has been the emergence of sickness and invalid’s benefit claimants as the largest group of working age beneficiaries. The population who receive sickness and invalids benefits is rising rapidly, despite the widespread availability of jobs, whereas the number of people on the domestic purposes benefit is falling slowly and the unemployment benefit population is falling rapidly.

So it makes sense in purely numerical terms to focus on the growing number of people who are out of the labour market on grounds of sickness and disability, particularly bearing in mind their long period of benefit receipt and resultant costs.

First, disabled people are much less likely to be in paid work than the non-disabled. They also face barriers to participation that do not relate directly to their underlying condition.

Secondly, we should not overlook the fact that many people who are disabled are in paid work. Being disabled does not automatically mean people are not participating in the labour force.

The NZ Disability Survey in 2001 found that 58% of disabled people of working age were employed, with 29% in full-time work. Having a disability seems to have the greatest effect, not on the ability to work, but on the ability to work full time.

Many people on sickness and invalids benefits do want to work, expect to get back to work and are able to work, even part-time, with the right sort of support.

Also, having a job is as important for increasing the wellbeing and incomes of the disabled as it is for people without disabilities. People who are disabled or suffer from long term health conditions and who do not have a job are considerably poorer than those who have paid work. Activity, including work, is important for health, well-being and social connection for many disabled people.

New Zealand, like many other countries, faces a continual rise in the numbers of people on long-term sickness and disability benefits, even when the economy is growing, unemployment falling and the demand for labour rising.

The government has recently announced that our sickness and disability policies are poised for major change in line with current international thinking.

What will change? The new model is based on the assumption that many sickness benefit and invalids benefit claimants want to work, and can work with the right support. Traditionally, they were not seen as able to work at all. This meant that they did not get the sort of support they needed to get them into sustainable, productive work. While that attitude may have seemed compassionate, in reality it could become a life sentence.

That will change. The new scheme focuses on helping people who can to stay in work or helping them to find a new job if a job is coming to an end, before they need to move onto a benefit.

It involves early intervention, more active case management, personalised support, changed expectations of clients and work incentives. Services will be targeted and integrated to support a return to full-time, part-time, or intermittent work.

The new policy is informed by evidence of what works and is also in line with much contemporary international policy thinking on increasing participation rates among those applying for or receiving disability-related benefits.

My hope is that today’s workshop will further our understanding of what works to facilitate a high level of participation in the labour force.

Alongside of measures to improve productivity, getting more New Zealanders into work which utilises their skills and meets their own aspirations is an important factor in lifting our economic performance, raising our productivity and improving our living standards.

My government is committed to seeing this happen. As I have mentioned, a number of initiatives are already in train. Those initiatives will help men and women to make real choices about working – choices that will benefit them and their families.

Some important challenges remain. Our understanding of what drives labour force participation is not complete.

I would like to congratulate the Treasury, the Ministry of Social Development, the Department of Labour and the Ministry of Women’s Affairs on assembling an impressive array of speakers for this workshop. What I as a minister would like to see coming out of the workshop is an enhancement of policy advice on lifting labour force participation that integrates the best available evidence and reflects co-operation and consultation between departments.

Thank you.

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