A recent report from the Boston Consulting Group (BCG) claims that “Australia will likely experience a severe labour shortage by 2030” – the country will have a shortage of 2.3 million workers.
BCG says that to avoid this shortage, the labour force will have to be increased through such measures as raising the retirement age and increasing overseas immigration.
BCG does not make a strong case for a “severe labour shortage”. Their simple model, extrapolating from recent economic growth, focuses on Gross Domestic Product (GDP) rather than GDP per person, and ignores population growth.
To estimate the required size of the future labour force, BCG first assumed that GDP will continue to grow as quickly as it has over the last 20 years – 3.5% per annum. BCG also assumed that production per worker continues at the 20 year average, of 1.4% per annum.
If workers achieve this level of productivity, maintaining GDP growth to 2030 requires the labour force to grow to around 16 million workers.
Using demographic data from the International Labor Organisation, a UN agency, BCG forecast Australia’s labour force to be less than 14 million in 2030, and therefore 2.3 million workers short of what is necessary to maintain the predicted GDP growth.
Long term population forecasts are sensitive to changing rates of birth, death, and immigration. Long term economic projections are even less certain, depending on population as well as technology, government policy and increasingly on environmental change.
Extrapolating in a straight line from recent GDP growth is a simplistic way to forecast future GDP growth. If Australia’s GDP growth had been slower, the 2030 prediction would be lower. If there had been a recession in the past 20 years, then BCG’s model would have forecast a labour surplus.
In addition, a strong factor in Australia’s recent GDP growth has been Australia’s recent high population growth. This means our recent population growth partly determined the target BCG sets for Australia’s GDP in 2030.
Rather than aiming only for growth in the size in our economy, it seems more appropriate to aim for growth that makes citizens wealthier (as well as being equitable and ecologically sustainable). That is, rather than looking only at GDP growth, we should also look at growth in GDP per person.
As noted, BCG assumes that Australia becomes wealthier per worker regardless of how fast either the workforce or GDP grows. According to its model, even under the claimed ‘severe labour shortage’ GDP per worker will continue to grow at a constant rate.
Even under more sophisticated analysis, population growth is not a strong factor for increasing wealth per person. The Australian Government Treasury’s 2010 Intergenerational Report (p14) argued “Growth in productivity is the primary determinant of growth in real GDP per person.” The report’s model found reducing population growth rates would only have only a small impact on GDP per person: if our population were to grow one third slower each year for the next 40 years, Australia would meet the same level of GDP per person just two years later. This does not sound “severe”: other economic forces are likely to have a much bigger impact over the next 40 years.
How we plan for population growth is likely to have a bigger impact. Poor planning can lead to increased congestion, environmental degradation and pressure on public services such as health or education. If public services are not expanded at the rate of population growth, this erodes public service delivery. Erosion of public services and the environment would impact economic growth and social wellbeing.
To meet these challenges, planning must keep up with the rate of growth. Increasing the rate of population growth makes planning more difficult and requires more upfront spending. But the models from BCG (or Treasury) do not consider risks involved in planning for high population growth.