We need more people to work longer!

Spoiler: In a previous post I argued that the lower growth of Swedish GDP per capita is a consequence of our own choice. As our incomes grew over time, we began to consume more services instead of goods. The shift in demand led to a reallocation of labour and capital from the more productive goods-producing industries to services. Thus, Services industries share of GDP has increased over time at the expense of Manufacturing industries. This led to decreasing growth rates. Furthermore, the reallocation of capital from Manufacturing to Services reinforced this decrease of growth rates. This development is a consequence of increasing prosperity.

As incomes have grown, we have chosen to work less. We have also chosen to have fewer children and smaller families. That has over time led to fewer people in the working ages supporting an increasing share of older people. It has also led to relatively fewer young people filling the ranks of the working population.

To prevent GDP per capita growth from stagnating, we need more people that work longer. But reversing declining fertility rates is not easy and increasing immigration can only help temporarily. To prevent GDP per capita growth, ee need to increase productivity growth.

Average hours worked per employee has decreased over time and contributed negatively to GDP per capita. A declining employment rate over time has also had a negative effect on our GDP per capita growth while an increasing labour force participation has increased GDP per capita. A declining working-age population reduces our GDP per capita growth rate. A declining share of the population in the working age over time means that a declining part of the population supports an increasing number of old people. This is a trend that will continue for decades ahead since we are getting older and giving birth to less babies, c.f. Table 1.

As explained in my previous post mentioned above, GDP per capita can be decomposed into GDP per hours worked, and the variables in the last four columns above. Adding the sum of those and GDP per hours worked yields GDP per capita. Assuming a Cobb-Douglas production function with production as a function of capital, labour (hours worked), and TFP, GDP per hours worked can be calculated as the sum of TFP and the capital-output ratio. The latter is adjusted for the dependency of capital on the growth rate of GDP per capita.  

When our incomes grew, we choose to work less.

Table 1 provides the development for decades since 1960, two longer periods, and the whole period. I will focus on developments during longer time periods below.

The first of the last four columns show average hours worked per employee. The average annual decrease in hours worked per employee between 1960 and 2020 amounted to 0.3 percent while output per hours worked, on average, increased by 2.3 percent annually during the same period. When our incomes grow, we can choose to work more or work less. Declining hours per employee shows that we chose the latter as higher incomes allow us to work less even though leisure time has become relatively more expensive, i.e., the income effect dominated the substitution effect. An annual average decline of 0.3 percent for the whole period is a substantial decrease.

A twice as large annual average growth rate in GDP per hours 1960-1980 than between 1980 and 2020, and changes in working hours legislation. Increasing real wages and an expansion of public childcare led to an increase in women’s labour supply. This substation effect was however not big enough to counteract the income effect. The decrease in average hours worked was reversed between 1980 and 2000 likely in response to increased insecurity due to poor economic conditions including our own financial crisis in the beginning of the 1990’s. It appears as a large share of those that became unemployed during this period were working part-time and/or had short-term labour contracts From 2000 onwards the income effect again dominates the substitution effect. However, to a smaller extent as the growth rate of output per hour is decreasing.

The employment rate was constant, around 97 per cent, until the Swedish financial crisis in the beginning of the 1990’s when employment fell by more than 10 percent between 1990 and 1993. It continued to decline until 1997. This explains most of the decline for the period 1960-2000. The recovery from that year was not big enough to reach previous levels and was discontinued by both the Global Financial Crisis and the Covid pandemic. Between 2000 and 2020 the employment rate has continued to decrease and contributed negatively to GDP per capita growth. The employment rate has had a negative contribution for the whole period of 0.11 percent per year. While the employment rate may increase again to previous levels, it can only increase GDP per capita growth temporarily once the natural rate of unemployment is reached.  

When our incomes grew, we choose to have fewer children.

The decline of the employment rate is not only the result of declining employment but also due to an increase in the labour force. The labour force participation rate, i.e., the number of people in the labour force relative to the population between 15-64 years old, contributed positively to GDP per capita growth both between 1960 and 2000 and after the Millennium. The two financial crises halted the positive contribution temporarily. The increase in the labour force participation rate had its strongest positive effect on GDP per capita growth during the 1970’s when the expansion of childcare was accompanied by an increase in women’s labour supply. The labour force participation rate contributed positively to GDP per capita growth during the whole period.

But. The positive effect from the labour force participation rate is a consequence of the labour force growing faster than the population between 15-64 years old, the working age population. And the working age population rate keeps decreasing. The reason behind the decrease is a consequence of our choices. With rising incomes, we have chosen to have fewer children which after some time translates into fewer people entering the working age.  This development began long ago as in other countries as incomes increased. The fertility rate is now around 1.7, c.f. Figure 1.

Figure 1. Fertility rate in Sweden 1950-2021.

Note: Statistics Sweden, www.scb.se

The fertility rate has been affected also by people forming families later and women giving birth later in life.

When our incomes grow, we live longer, and a smaller labour force is supporting an ageing population

At the other end of the age structure is the older part of the population, people being 65 years of age and older. This part of the population has increased over time doubling its share of total population from 12% in 1960 to 20% in 2020. At the same time, the working age population rate has decreased from 66% to 62%. Since the share of young people. 0-14 years of age has decreased from 22% to 18% over the same period, our population is getting older.

An ageing population is also an effect of higher incomes leading to demographic transition which takes place countries when prosperity increases. As our incomes have grown, more resources have been devoted to elderly care, we have produced more and better medicines, medical equipment and treatments of diseases that have led to declining mortality rates and increasing life expectancy over time. The combined effect of having fewer children and an older population shows up in the youth- and old-dependency ratios over time, c.f. Figure 2.

Figure 2. Dependency ratios in Sweden 1950-2020.

Source: OECD, https://stats.oecd.org/#

An ageing population is also bad for future growth as we tend to consume more and save less the older when we grow older. Many countries with similar income levels also face this dilemma. But if I’m not mistaken, this is compensated by more middle-aged people in growing countries, especially in Asia.

The youth dependency ratio is calculated as the number people in the ages 0-14 relative to the working age population, in the ages 15-64. The old dependency ratio is the number of people in the ages 65+ relative to the working age population. According to a population scenario until 2060 by Statistics Sweden, the working age population ratio will continue to decline to around 58% in 2060 from today’s 62%.  The increasing dependency ratios mean the government need to collect more taxes and other kinds of revenues to pay for the increasing expenditures associated with elderly care.

Increasing GDP per capita growth by working longer and increasing the population?

As mentioned above, increasing incomes have allowed for better medicines, and treatments of diseases. We now live longer than before, and we are healthier than before. This allows for a longer working life, at least in those occupations that are not as heavy or burdensome for our bodies. Increasing the working age to 69 years of age, would increase the working age population as a share in total population from today’s 62% to 67% and decrease the old-dependency ratio from 33% to 23%.

This would be helpful, but maybe difficult to accept. What’s the point of achieving more if you can’t reap the benefits of it? Maybe, there are other ways. The working force population can be increased by more young people entering the working ages and immigration.

Since increasing real wages and technological developments have led to smaller families being formed later, and women giving their first births later, it is difficult to imagine that fertility rates will increase enough to compensate for a smaller working age population.

Can immigration do the trick? Probably not. As demographic analyses show, net immigration cannot permanently compensate for an ageing population where the life expectancy increases. The Immigrants needed to compensate for an increased share of older people in the next decade, themselves approach the retirement age twenty years later. That requires an even larger group of immigrants to compensate for the increase of newly retired. This process would then need to repeat itself for every generation with larger net immigration. Simulations in this report show that to keep the 2015 age structure constant until 2080, a net immigration of 38.1 million would be necessary which corresponds to an increase of the population by some 440%.

The required net migration is so large because its effect on the age structure is much smaller than an increased fertility rate. This doesn’t mean that we shouldn’t have immigration or that we shouldn’t make it easier to come here and work. And we should try harder to increase employment for refugees. Even though we are known for having dysfunctional labour and housing markets making integration difficult, things have improved. Refugees are becoming employed faster over time. For refugees arriving in 1997, and had been here for 23 years in 2020, it took more than eight years before half of them were employed while it took less than four years for those arriving in 2015, c.f. Figure 3.

Figure 3. Share employed of refugees arriving 1997-2020 in Sweden.

Source: Statistics Sweden. https://www.statistikdatabasen.scb.se/pxweb/sv/ssd/START__AA__AA0003__AA0003B/MotFlyktAldKon/

More detailed analyses show large variations in how fast refugees get established on the labour markets across different years of arrival. The variations in becoming employed depend on where the refugees came from, their age structure, cultural differences, educational levels, and business cycle conditions. In any case, decisions about accepting refugees should not be made on assessments whether they can contribute more to the welfare state than they cost. People than are forced to flee from oppression, violence and bombs should be welcome.

Unfortunately, the new Swedish government is keen on not only on restricting the number of employees but also on restricting immigrants who come here to work. Apparently, the government knows better than employers whom to employ. In its wisdom, the government also has decided to change the rules for permits to live in Sweden. People that already have been granted such permanent permits may now have to apply for temporary permits.

What about human capital?

Apologies for the derail about derailed policies. In this post I have shown that we need more people, and we need to work longer. Working longer may be hard to accept. A larger population can come about by increasing the fertility rate and immigration. Having more children will increase the working age population ratio. Increased immigration will not.

In this post I have treated labour as homogenous and only analysed the effects of the quantity of labour. In a future post, I will try to analyse the effect of GDP per capita growth of the quality of labour, i.e., human capital. And if I remember, I might see if there is a case for promoting high-skilled immigration to Sweden. That might be difficult to achieve due to less favourable conditions for high-skilled labour in Sweden compared to other countries. Thus, we need to increase productivity growth in other ways to prevent GDP per capita from stagnating. I will be posting more on that later.