Lesson 6 — Labour Force & productivity

How ageing affects labour supply & productivity

Ageing reduces quantity of labour, productivity, and skills unless offset by policies.

Formula for GDP production function

GDP production function : GDP=A⋅f(K,Le)

Formula for effective labour (Le)

Effective labour: Le = a_p × Edu × L

Channel 1: age dependent productivity profile

At individual level, productivity follows an inverted U-shape; at aggregate level ageing reduces average a_p.

How to prevent productivity decline with ageing

Retraining, job redesign, and technology usability can sustain productivity of older workers.

Channel 2: effect of ageing on L

Falling fertility reduces working-age population and lowers labour supply.

Channel 2: LFPR responses

Older and female workers may increase LFPR, partially compensating for ageing.

Channel 3: education & skills

Education and skills raise labour quality and counteract ageing effects.

How education mitigates ageing effects

Lifelong learning helps older workers maintain productivity.

Effect of ageing on Le under no policy change

Without policy: L↓ and ap↓ → Le↓ → GDP↓.

Policies that raise Le despite ageing

Retraining, job redesign, education, delayed retirement, and technology adoption can raise Le despite ageing.

Fertility decline impact in Korea (Bloom et al., 2007)

South Korea's TFR declined from 5.6 (1960) to 1.2 (2000–2005).

Female LFPR change in Korea

Korean female LFPR (25–39) rose from 26.6% to 54.5%.

Pure Solow effect definition

Lower fertility → smaller population → GDP per capita rises mechanically.

Pure Solow effect magnitude

Pure Solow effect increases GDP per capita by +36%.

Age structure effect mechanism

Lower TFR reduces child dependency, increasing working-age share.

Age structure effect magnitude

Age structure improves GDP by +47% above the Solow effect.

Female LFPR response effect

Lower fertility frees time → more women join labour force → +21% GDP.

Total GDP gain from TFR decline (Korea)

TFR decline raises GDP per capita by +141% above baseline.

Growth contribution from TFR decline

TFR decline added +1.9% annual growth (1960–1990) and +1.2% (1990–2020).

Why real-world effects reduce the 141%

Lower mortality, ageing, and elderly LFPR decline reduce the simulated 141%.

TFR–LFPR relationship universality

No; some countries show a positive or zero TFR–LFPR correlation.

Human capital channel from lower TFR

Lower fertility → more resources per worker → higher labour quality.

Savings and retirement extension channel

Fewer children → more need for self-sufficiency → higher savings & later retirement.

Main takeaway of Bloom et al. (2007)

Large GDP gains come from population size decline, DD, and female LFPR.

Trend in elderly LFPR (Gruber & Wise)

LFPR for men 60–64 fell from >70% to <20% across OECD except Japan.

Early-retirement age effect

Early benefit eligibility signals 'old age' and encourages retirement.

SSW accrual concept

SSW measures retirement benefit value at different retirement ages.

When SSW discourages work

If SSW at age a+1 is lower than SSW at a, working longer is penalised.

Two mechanisms causing early exit

Early-retirement age + negative SSW accrual push workers out early.

Why early exit is harmful

Early exit reduces lifetime income, productive capacity, tax base, and pension sustainability.

Canada study research question (Tang & MacLeod, 2006)

Whether rising older worker share reduces productivity in Canada.

Older worker share effect

Each 1% increase in older worker share reduces productivity growth by 0.07%.

Capital intensity effect

Capital deepening strongly boosts productivity and offsets ageing.

Human capital effect

Skilled labour mitigates ageing’s negative productivity effects.

Unemployment effect on productivity

Productivity is procyclical; unemployment reduces it.

Key insight from Canada productivity study

Ageing lowers productivity, but capital and skills can offset fully.