Clearing the cullter on population, productivity and participation

QUITE a lot of things come in threes.

QUITE a lot of things come in threes.

There are Three Stooges, the Three Tenors, The Three Musketeers, Three Amigos and the three Ps (population, productivity and participation). Now everyone knows the difference between Larry, Curly and Mo and between Luciano, Jose and Placido.

But confusion reigns when it comes to distinguishing between the three Ps, particularly productivity and participation. Opposition treasury spokesman Joe Hockey, for instance, has tripped up on this point.

We were introduced to the concept of the three Ps in the first Intergenerational Report released by the Treasury in 2002. In order to cope with the economic consequences of an ageing society, the key roles of population, productivity and participation were delineated and explained.

Population growth can in theory abate the rate at which the median age of the population rises. However, it is an issue of flow and stock -- higher rates of population growth (the flow), be it natural or via migration, will only have a limited impact on the proportion of the population (the stock) in the older age groups.

Given the government's new-found aversion to a Big Australia, that P seems to have been ruled out as a policy response.

That leaves the other two Ps: productivity and participation. Technically speaking, per capita GDP growth is the sum of productivity growth and the growth of labour utilisation (the ratio of hours of work to population). The latter is approximated by the participation rate.

Per capita GDP can grow rapidly because productivity grows rapidly, because participation grows rapidly, or some combination of the two.

But the factors that drive strong growth in these two Ps tend to be quite distinct, although strong economic growth that is the result of productivity growth is likely to induce higher participation over time.

By contrast, some policies that increase the participation of marginal groups in the workforce -- arguably Work Choices had this effect -- will lower the rate of growth of productivity. However, most observers would welcome a more equitable outcome in the labour market even if the short-run price is lower productivity growth.

In fact, judging the various policy options that impact on the two Ps of productivity and participation can be complex and difficult. In this context, a key question is whether targeting higher labour force participation is really an appropriate policy objective.

There was a time, not so long ago, when we were teased by the prospect of more leisure as we grew richer. Indeed, one of the benefits of higher per capita income arising from higher productivity is the ability to achieve the same output with fewer inputs.

For this reason, it has become a rather strange obsession of government policy to seek to increase the labour force participation rate. For instance, in a recent report by Skills Australia, Australian Workforce Futures, a target of 69 per cent is set down for the overall labour force participation rate by 2025 (the current rate is just over 65 per cent), with specific targets for particular groups with low participation: women aged 25-34, men aged 25-54 and older Australians 55-64. And in an address to a CEDA breakfast this week, the Prime Minister has also emphasised higher labour force participation as one of the planks of the government's reform agenda.

These stated ambitions raise an important question. How does Australia really compare in terms of labour force participation relative to what Skills Australia terms "high performing OECD countries" (which includes Australia, by the way)?

When careful comparisons are done, Australia actually comes out very well, in the top five. (Australia's unadjusted position is less impressive but this does not account for the uneven treatment of national military service, prisoners and different age categories across OECD countries.) So at the macro level, there is nothing much to worry about.

Our young people, in particular, participate at a very high rate, with the combination of education and work now a firmly embedded practice in this country. It is certainly true that Australian women of child-bearing age participate at a lower rate than in a number of countries (including the US, interestingly, without any statutory paid parental leave arrangements).

But is this outcome just a reflection of legitimate and deliberate choices on the part of these women or should governments be seeking to push them into the workforce?

Similarly, prime-age males in Australia seem to participate less, as do those nearing retirement. If we disaggregate further, we can see that it is less educated males who are not in the labour force and, in turn, many of these are on the Disability Support Pension.

So is it a legitimate objective of government policy to seek to raise the labour force participation rate? As long as the distortions to participation are minimal and taxpayers are not expected to contribute disproportionately to the decision not to participate, how people opt to organise their lives is an act of free will and should be treated as such.

And, of course, "non-participation" can include many very useful activities such as volunteering, community service and caring for loved ones.

But how widespread are these distortions and what should be done to remove them?

The importance of disincentives and barriers to participation vary between different groups. They include: the interaction between the tax and transfer (most particularly, family payments) systems; the availability and affordability of childcare; the lure of welfare benefits that entail disincentives to work, even on a part-time basis; and public housing rental arrangements.

More recently, changes made to tax rates and welfare arrangements have made it more attractive for single parents with young children, in particular, to participate in the labour market. Even so, the effective marginal tax rates remain unacceptably high for some groups and represent meaningful barriers to labour force participation. Coaxing those with mild disabilities back into the workforce is likely to result in gains all round.

However, the real game is productivity and this is where Australia's recent record has been absolutely woeful. Depending on the precise period and measure chosen, productivity in the 2000s has been either flat or gone backwards. Were it not for the buoyant terms of trade, per capita incomes would have flat-lined.

This is where government policy is wanting: too much emphasis on large-scale and expensive projects and too little emphasis on the elements that make up a competitive business environment in which participants can respond flexibly and quickly to the changing incentives. Figuring out the difference between the three Ps would also help.

Professor Judith Sloan is an economist and company director. She was a commissioner of the Productivity Commission.