Wanted: Policies to Encourage and Enable Work in Advanced Economies
IMF Blog, April 9, 2018
Source details
- Canonical URL
- Wanted: Policies to Encourage and Enable Work in Advanced Economies
Other formats
Bibliographic details
- Authors: Francesco Grigoli, Zska Kczn, Petia Topalova
- Published: April 9, 2018
Overview and context
- Authors: Francesco Grigoli, Zsóka Kóczán, Petia Topalova
- Publication date: April 9, 2018
- Research linked to Chapter 2 of the April 2018 World Economic Outlook.
- Central problem: Population growth in advanced economies is slowing, life expectancy is rising, and the number of elderly people is soaring, which could slow growth and threaten the sustainability of social security systems unless policy responses enable those willing to work to do so.
Striking differences in participation
- Dependency ratio (ages 65+ as a percent of ages 20–64) for the median country:
- increased from 27 percent in 2008
- to 34 percent currently
- expected to increase to 55 percent by 2050
- Aggregate labor force participation defined as the fraction of population, ages 15 and over, either working or looking for work.
- Notable participation trends:
- Participation by women increased dramatically since the mid-1980s.
- Participation has picked up considerably among older workers.
- Participation has fallen among the young.
- Prime-age men, particularly those with lower educational attainment, have become increasingly detached from the labor force in almost all advanced economies.
- The United States experienced a decline in both female and male prime-age labor force participation.
Various forces at play (findings from historical analysis)
- Timeframe and scope: analysis of changes in participation of various groups over 1995–2011 for the average advanced economy.
- Factors quantified: aging, economic cycles (including the global financial crisis), labor market policies and institutions (tax-benefit systems, public spending on active labor market programs, targeted policies), structural factors (rise of the service sector), and exposure to global forces (technological advances and trade).
- Key findings:
- Aging and the effects of the global financial crisis can explain a significant share of the decline in participation of men during the past decade.
- Rising participation of women shows that policies can significantly shape labor supply decisions and help counteract aging.
- Labor market policies, institutional factors, gains in educational attainment, and structural changes account for the bulk of the dramatic increase in labor force participation of prime-age women and older workers in the past three decades.
- More supportive policy changes in Europe and larger gains in educational attainment among prime-age European women help explain differences in participation trends relative to the United States.
- Automation has weighed on participation rates of most groups of workers, with more persistent negative effects in the United States than in Europe.
- Individuals whose current or past occupations are more vulnerable to automation are significantly more likely to drop out of the labor force.
- Policies that improve job matching, higher spending on education and active labor market programs, and access to more diverse labor markets tend to lessen the negative link between automation and labor force attachment.
- Policymakers should be mindful of difficult adjustments from technological advances on some sectors, occupations, and geographic areas.
Encouraging labor force participation (policy recommendations)
- Policies to encourage joining or remaining in the labor force and to help combine family and work life:
- Public spending on early childhood education and care.
- Flexible work arrangements.
- Parental leave.
- For older workers:
- Reduce incentives to retire early by raising retirement ages or making pension systems more actuarially fair, while ensuring other goals (such as a basic social safety net for vulnerable individuals) are not jeopardized.
- Structural and immigration considerations:
- Dramatic demographic shifts could overwhelm policy ability to fully offset aging.
- Illustrative simulations indicate aggregate participation will eventually decline—even if gender gaps are fully closed—and participation of older workers would have to rise significantly to stem the decline in aggregate participation.
- Bringing policies to “best practice” (from the point of view of labor force participation) can mitigate some of the drag from aging.
- Unless technological progress delivers offsetting productivity gains, many advanced economies may need to rethink immigration policies to boost labor supply, alongside policies to encourage older workers to postpone retirement.
- Efforts to curb international migration would further worsen demographic pressures, though receiving migrants can pose challenges for host countries.
Source: Wanted: Policies to Encourage and Enable Work in Advanced Economies (IMF blog post, April 9, 2018).
