After reaching an all-time high of 65.8% in November 2010, the proportion of people aged 15+ who are either in work or actively looking for work has declined sharply, hitting 64.8% in October this year. An important question for policy makers is this: is the participation rate declining because people are being discouraged from looking for work, or is it declining as a natural consequence of the ageing of the population?

I’ve posted about this issue before, and the September edition of the ACTU Economic Bulletin contains more detailed analysis. Given the importance of this question, I thought it might be worth posting an updated version of the central chart in that analysis:

part age

This chart decomposes the fall in the participation rate into two components. The first is the decline in overall participation that has come about because of falls in participation within individual age groups. The second is the decline in the overall rate that is a consequence of the ageing of the population – a larger share of the population is now aged 65+ than was the case three years ago.

You can see in the chart that I ascribe all of the decline in participation between November 2010 and May this year to the ageing of the population. That is, if the demographic composition of the population hadn’t changed between these dates, I estimate that the participation rate in May 2013 would’ve been the same as in November 2010. But since then – over the past six months or so – most of the decline in participation has been caused by falls in the participation rate within individual age groups. The falling participation rate in recent months has been cyclical, not structural, according to my calculations.

You get a similar picture if you use the simpler approach of comparing the participation rate for everyone aged 15+ with the rate for people aged 15-64. In April/May this year, the 15-64 rate was not far off its all-time high, but it has declined since then.

part age2

Some points I’d take away from this:

  • With the population ageing the way it is, calculations of what the unemployment rate would’ve been if the participation rate hadn’t changed are even less informative than usual;
  • Anyone who looks at the 15+ participation rate, compares it to the past, and draws policy conclusions without taking ageing into account is either misguided or trying to mislead you; and
  • While ageing was the reason for falls in participation up to May this year, the fall since then has mostly been within age groups, so we can probably conclude that there has been some ‘discouraged worker’ effect.

Note: In this post, all figures refer to trend estimates, not the seasonally adjusted figures.