UK GDP could be boosted by £180 billion if we could extend working lives to match New Zealand

June 19, 2018

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by George Mason Economist

Email +44 (0)7710 033205

by Saloni Goel Economist

Email +44 (0)7730 596332

By 2050, the number of people in the OECD aged 55 and over will grow to over half a billion. Whilst it is good news that we are living longer, an ageing population is already putting significant financial pressure on health, social care and pension systems, and this will only increase over time in the UK and other OECD countries. Enabling older people to remain in work for longer could help to alleviate the financial burden on taxpayers, whilst also bringing a number of health benefits. So, how can policymakers and businesses support older workers to extend their working lives?

To answer this question, and to see how different countries are harnessing the power of their older workers, we have updated our Golden Age Index – a weighted average of seven indicators that reflect the labour market impact of workers aged over 55 in 35 OECD countries, including employment, earnings and training.

This year, the UK achieved its highest index score since 2003, but its rank has fallen from 18th to 21st over the period, as other countries have improved their relative index scores at a faster rate. Germany, Israel and New Zealand have seen the largest improvements in the rankings, whilst Mexico, Greece and Turkey have seen the biggest declines (see Figure 1).

Figure1goldenage150618

New Zealand is now up to second in the index behind Iceland, which is rather a special case. If the UK could raise its full-time equivalent employment rate for those aged 55 and over to match rates in New Zealand, we estimate it could boost UK GDP in the long run by around 9%, equivalent to around £180 billion a year at today’s GDP values.

But what drives differences in working lives across countries? To find out, we use an econometric approach to analyse possible drivers of employment rates of older workers across the OECD (see Figure 2).

Figure2goldenage150618

What we find is that there are a number of structural and policy factors that can help to explain the employment rate amongst older workers, including:

  1. Public pension expenditure –we find that generous pension benefits can have adverse effects on the incentive for older people to participate in work. This suggests that pension policies should be carefully designed. This might include measures such as increasing state pension age in line with rises in life expectancy and financial incentives for each year of deferred public pension.
  2. Life expectancy – countries with higher average life expectancy tend to have a greater proportion of older people in work. A healthier workforce is more productive and able to contribute more to society. As such, governments should ensure that medical advances in healthcare are accessible to older workers to promote their well-being. Businesses should also be encouraged to promote better health among older workers in particular, for example through ergonomic design of workplaces as well as corporate health insurance schemes.
  3. Gender participation gap – lowering the barriers that prevent women from participating in the labour force is likely to improve the employment rate for older workers. For example, continued support for women, especially during the earlier years when they start a family, is likely to increase the amount of time they spend in the labour force after parental leave.

But what factors might influence employment rates of older workers in the future? Given that technology is advancing at a rate faster than ever before, it is necessary to analyse both the huge productivity gains at stake, but also the potential risk posed by automation. Below, we look at how employment rates for older workers are likely to evolve in future (see Figure 3).

Figure3goldenage150618

Our analysis suggests that up to 20% of the existing jobs of older workers across all countries and sectors could be potentially automatable by the late 2020s, higher than the average automatability estimate for workers of all ages (19%). Within the UK, up to 23% of older workers could be at risk, compared to 20% of workers from all age groups. So, why are older workers somewhat more likely to be affected? And what does this mean for public policy?

Our analysis suggests two main reasons:

  1. At present, the average education level of older workers tend to be lower than for younger age cohorts. For example, in the UK, approximately 12% of people aged 50-64 have no qualifications, compared to only around 6% of people aged 20-49. Workers with lower levels of education are at higher risk of job automation as the roles that they are employed in are typically more susceptible to automation.
  2. A greater proportion of older workers (particularly women) are also employed in clerical roles, of which we estimate up to 50% could be at risk of automation within the next 10 years.

In response, policymakers should focus on measures to provide lower skilled older workers with more learning opportunities to broaden their skillsets (working with businesses, trade unions and educational providers). In particular, technology training (both formal and informal) is vital in improving worker productivity, employability and readiness to adapt to further technological change. This, coupled with a stronger focus on flexible working, will be essential for governments looking to unlock the potential $3.5 trillion prize at stake across the OECD from matching New Zealand levels of older worker employment rates.

by George Mason Economist

Email +44 (0)7710 033205

by Saloni Goel Economist

Email +44 (0)7730 596332