The macroeconomic impact from extending working lives
Findings from research, conducted by the National Institute of Economic and Social Research (NIESR) and funded by the DWP.
This report presents findings from research, conducted by the National Institute of Economic and Social Research (NIESR) and funded by the Department for Work and Pensions (DWP). NIESR were commissioned to use their global econometric model, NiGEM, in order to model various scenarios involving extending working lives, and to quantify the macroeconomic effects therein. The core scenario is a one year increase in working life for the UK population that is gradually phased in over the period 2010-14. In addition to this, NIESR carried out a series of counterfactual analyses which modelled the loss to the economy from older people leaving the labour market early.
The main findings are:
- A one year extension of working life increases real GDP by around one per cent about six years after its implementation.
- A one year extension of working life increases the level of employment by around 1.6 per cent (467 thousand), about four years after implementation.
- If the plans for state pension age (as published in the Pensions Act 2007; raising state pension age to 68 by 2046) were not implemented then the UK’s real GDP would likely be almost six per cent lower than it otherwise would have been by 2030, with the level of employment around seven per cent lower.
- Around 1½ per cent of the working age population withdraw from the labour force through early retirement. A hypothetical counterfactual analysis of no early retirement suggests this would have boosted GDP by around 1 per cent (£14 billion) in 2009.
Notes to Editors:
- The report “The macroeconomic impact from extending working lives” by Ray Barrell, Simon Kirby and Ali Orazgani (National Institute of Economic and Social Research, NIESR) is published today as part of the DWP Working Paper series. A copy of the report and summary of the research can be downloaded from the Department’s website at http://research.dwp.gov.uk/asd/asd5/wp-index.asp
- The report was funded by the Department for Work and Pensions to evaluate the effects of extending working lives. The baseline used in this project is a forecast that includes the announced increases in State Pension age. In order to put this work into context the DWP also requested some counterfactual analysis to evaluate the potential losses to the economy if the planned increase in State Pension age and equalisation of women’s State Pension age with men’s did not take place.
- The core of the work commissioned by the DWP concerned the potential impact from future extensions of working life. There are a significant number of scenarios that could be run within this general context. The set of scenarios were chosen to enable a comparison of different plausible variants to be made given the current plans for the increases in the State Pension age. As well as providing macroeconomic results from an extension of working life, they were designed to highlight the differences between less and more radical changes. These include increasing working lives by one, two or three years; implemented at different speeds and over differing future time horizons (starting now or in ten years time). Sensitivity analyses around these results were also undertaken and focused on two phenomena: the hours worked by those that extend working lives and the speed at which investment is increased in response to the expansion of the supply of labour.