The three Ps versus the three Stooges

I have this piece in the Business section of the Australian today:

Quite a lot of things come in threes: the Three Stooges, the Three Tenors, the Three Musketeers, the 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. Joe Hockey, Shadow Treasurer, for instance, has recently tripped up on this point.

 We were introduced to the concept of the three Ps in the first Intergenerational Report released by the Australian 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 WorkChoices 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 child care; 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.

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26 Responses to The three Ps versus the three Stooges

  1. daddy dave says:

    I think I missed the point. Surely high labor force participation is good, because it means a smaller underclass of permanent welfare dependents?
    So that makes it a Good Thing in its own right, independent of productivity or GDP. Right?

  2. rog says:

    I thought Workchoices was shooted, rooted and electrocuted ie dead and buried, extinct and not moving. Is this an example of the free peas?

    I think that you need to spend more time in the garden, Judith.

  3. rog says:

    Of course, business section of the Murdoch rag. My mistake.

  4. rog says:

    In fact, the title sets the tone for the article – a piece of crap. Basically you have said that everything is a joke, just like the Three Stooges. Well maybe but not everyone likes to be thought of as a joke of academia.

    If you want my advice, Judith, try not to alienate your audience with such obvious condescension. Or you could try a different hobby and take up gardening.

  5. JC says:

    Wodge of course is an AFR man. Has been since he graduated from the (AJA) Australian Joinery Academy.

  6. JC says:

    She’s not really look for your advice, Wodge. In fact I can’t reckon anyone here ever wanting your advice, you old AFR man you.

  7. Samuel J says:

    There are nine Ps:

    Productivity, Participation and Population
    Purchasing Power Parity
    Public Private Partnership

    perhaps more 3ps?

  8. rog says:

    As they say, with friends like JC who needs enemies?

  9. JC says:

    If Japan is a indication of what happens to an aging population, it has really bad implication for GDP growth.

  10. Infidel Tiger says:

    Don’t be condescending, take up gardening?

    Have you messed up your medication, Rog?

  11. rog says:

    Nine P’s make for one long piss.

  12. rog says:

    Any other corollarys you would like to share JC?

    How about japan and tuna fishing?

    Or wife beating?

    No end of ’em

  13. ken n says:

    rog please try to concentrate on the issues.
    Work Choices did increase flexibility of labour and almost certainly increased participation. I doubt than anyone on the left would. being honest, disagree with that.
    Those opposing it objected to its effect on unions. That’s a valid argument (tho I don’t agree) and they won. But it dos not alter the original point.

  14. C.L. says:

    I suspect Rog was set off by a post title that reminded him of how many times he has to get up at night these days.

    Be charitable, everyone.

  15. JC says:

    Ken

    Don’t waste your time. It’s like reading War and Peace to a dog. It’ll sit there like it’s listening and then just fall asleep on the couch without one word being understood except anything remotely sounding like “walkies” or “din dins”, which reflexively causes the right ear to rise and descend slowly.

  16. Oooh. CL made a reference to prostate problems. What a cruel and unfunny thing to do. You should be ashamed.

  17. C.L. says:

    I did?

    I’ll take your word for it, 60s flower child.

  18. Matt C says:

    Excellent article Judith. Could you please also do a follow up demolishing the misuse of the concept “productivity”.

    Every infrastructure investment apparently increases “productivity”. Yet productivity is outputs / inputs. When you invest a lot in the denominator of that equation it is not a fait accompli that you increase the result of the quotient.

    Some examples would include desal, wind farms and NBN.

  19. rog says:

    I don’t see how Ken, Workchoices led to the Your Rights at Work campaign and the unleashing of $Ms for the 2007 campaign. Workchoices was badly conceived and badly executed and became a political poison.

    As has been pointed out numerous occasions, if Howard had just left well enough alone the unions would have continued to diminish. But after locking up refugees and beating up single mothers he was running out of political stunts so started his “IR reforms”. As Corrigan has noted, it is most likely that any reforms to the waterfront have now been lost.

  20. ken n says:

    I agree, mostly, with your first para rog.
    But not the second. Howard has believed in labour market deregulation for a long time. WC was not a stunt and it did have some quite positive results – it probably slowed inflation for a while which before the GFC (and perhaps now) is one of our greatest problems.
    Though politically WC was a step too far I’ll bet we will see something like it again – perhaps even from the ALP. Remember Harke/Keating started labour deregulation.
    Unions are dying and that will continue. Rodney Cavalier’s book is good on that.

  21. rog says:

    I talked with some lawyers about how they worked on the formation of WC, it was a nightmare as various law firms firms worked on sections and then the Libs just lumped it all together. The lawyers didn’t have much if any experience of IR yet jumped in as it paid well. The result was a document that had little to no relevance to IR that is sustainable. I would hazard a guess that Howard has no idea of IR either which is why he went ahead with the monster. So any talk of resurrecting it is just idle speculation.

  22. ken n says:

    Yes, it was not a good job.
    Your guess on Howard is wrong – he understands IR very well but apparently took his hands off the wheel with WC.
    The most important question is whether we will have further IR reform and the answer is certainly yes.
    Much of what happened under WC was buyout of benefits and restrictions. Only a few employers used it to reduce wages.
    Lack of flexibility in employment practices remains one of the biggest obstacles to productivity improvement.
    No government will be able to ignore that for very long.

  23. rog says:

    Sorry Ken but Howards alleged understanding of IR was not reflected in WC (an apt abbreviation)

  24. JC says:

    Wodge:

    You attacked Judith because she rightly suggested we require more labor market flexibility telling her she needs to attend to her garden a few times in that offensive, little England ill-educated way that only you know how.

    You are now discussing the merits and demerits of Workchoices as though that has anything to do with the criticisms you leveled against her.

    What a complete moron you are. What a total waste of freaking space.

  25. . says:

    Work Choices was a constitutional disgrace.

  26. Rodney says:

    Ken N. is optimistic about tne labour market becoming more flexible. Spain has 20% unemployment and still cannot free up its market.
    Improvements in flexibility are hard won and easily lost. The current trend is clearly backwards.
    Daddy Dave is correct. The increase in minimum wage, oncosts and general inflexibility creates an increasing class of depressed welfare dependants.

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