09 May 2018
This is the first in a series of short ILC reports exploring the relation between demographic forces and macroeconomic outcomes.
This paper uses English local authority data to explore the economic effects of two demographic forces: 1) the 50+ share of the workforce and 2) the 70+ share of the population. Economic impacts are measured in terms of output per worker (GVA per worker).
Based on analysis of English Local Authority data, the report finds that ageing impacts workforce productivity through two channels. First, a higher share of older people in the workforce acts to drag down the overall level of productivity which may be because work suffers from diminishing returns. Second, an increased share of elderly people in the population, raises the rate of productivity growth. We suggest this may be because restrictions to labour supply boost incentives to invest in capital and innovate. More specifically we find:
- Across English local authorities, the level of health and education is strongly correlated with workforce productivity. Raising the level of education and health of the population will therefore remain key drivers of workforce productivity irrespective of age
- However, after controlling for health and education in a regression model of productivity, the age of the workforce does matter. Specifically, the higher the proportion of the workforce aged 50+, the lower the level of productivity
- When exploring changes in productivity between 2001 and 2011 we find that overall age structures also matter. In particular, the higher the increase in the proportion of people aged 70+, the faster the rate of productivity growth
- We outline possible reasons for the dual effects of age on productivity. We argue that the negative relationship between the 50+ share of the workforce and the level productivity is because work suffers from diminishing returns – for every year worked, there is a relatively smaller gain in output. Meanwhile the positive relationship between the 70+ share of the population and productivity is likely driven by scarcity of labour compelling investment and innovation
- More research is needed to fully unpick the factors underpinning the dual effects observed in this research
'Does ageing matter when it comes to workforce productivity?' provides support to both prevailing conclusions in the recent economic literature regarding the impacts of ageing on productivity. An older workforce may be a drag on output, but an ageing population could raise the rate of productivity growth. The extent to which we can limit the former channel and maximise the latter will help to determine our future economic prospects.
Ben Franklin, Assistant Director of Research and Policy, ILC-UK said:
‘With reference to English Local Authority data, this report provides support to both prevailing conclusions in the economic literature regarding the impacts of ageing on productivity. An older workforce may be a drag on output, but an ageing population could raise the rate of productivity growth.
In any case, investment in education and health are likely to remain critical drivers of long run productivity. Both are strongly correlated with the productivity performance of local authorities in our analysis, and focusing on the health and education of the workforce, irrespective of age, is therefore likely to support higher levels of economic output’.
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