Impact of the Demographic Shock on Quebec`s Economy Improved

RÉGIE DES RENTES DU QUÉBEC SEMINAR
Québec, 27 November 2009
Impact of the Demographic
Shock on Quebec’s Economy
Improved Productivity Necessary
to Mitigate the Disruptions to Come
Hélène Bégin
Senior Economist
Presentation Outline
Part 1 - The consequences of demographic shock
¾ Aging will have major consequences on the labour
market.
¾ The decline in the labour pool will weaken economic
growth.
¾ Public finances will be strained.
¾ What are the solutions to soften the impact of
demographic shock?
Part 2 - Productivity: The key to prosperity
¾ How can Quebec tackle this challenge?
1.1 – Portion of the population aged 65+ in
the following industrialized economies
Japan
Europe
North America
2023f
2018f
United States
2008
Canada
Ontario
Quebec
In %
0
5
10
15
f: forecasts
Sources : United Nations, Statistics Canada, Institut de la statistique du Québec
and Desjardins, Economic Studies
20
25
30
1.2 – Growth of population aged 65+ will accelerate in Quebec
whereas population aged 15 to 64 is set to decline
% ann. change
4.0
% ann. change
4.0
Projections
3.5
3.5
3.0
3.0
2.5
2.5
2.0
Population aged 15 to 64
Population aged 65+
1.5
1.0
2.0
1.5
2014: Decline in the potential
labour pool
1.0
0.5
0.5
0.0
0.0
(0.5)
(0.5)
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Sources: Institut de la statistique du Québec and Desjardins, Economic Studies
1.3 – Shrinking labour pool will prove
troublesome for Quebec
% ann. change
Population aged 15 to 64
% ann. change
2.4
2.4
Projections
1.8
1.8
Quebec
Ontario
1.2
Canada without Quebec
1.2
0.6
0.6
0.0
0.0
(0.6)
(0.6)
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023
Sources: Institut de la statistique du Québec, Statistics Canada and Desjardins, Economic Studies
1.4 – Decline in labour force affected
potential GDP growth in Japan
% ann. change
% ann. change
4.5
2.0
Labour force (left)
4.0
Potential GDP (right)
3.5
1.5
3.0
1.0
2.5
0.5
2.0
1.5
0.0
1.0
(0.5)
0.5
(1.0)
0.0
1980
1984
1988
1992
1996
2000
Sources: Japan Cabinet Office, Statistics Bureau of MIC and Desjardins, Economic Studies
2004
2008
1.5 – The growth potential of Quebec’s
economy will deteriorate significantly
Potential GDP
% ann. change
% ann. change
3.0
3.0
Forecasts
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
1999
2002
2005
2008
2011
2014
2017
Sources: Statistics Canada, Institut de la statistique du Québec and Desjardins, Economic Studies
2020
1.6 – Quebec’s public finances are already under pressure
In %
50
In %
50
Net debt vs. nominal GDP
Forecasts
Sources: Ministère des Finances du Québec and Desjardins, Economic Studies
2010-2011
2009-2010
2008-2009
2007-2008
2006-2007
2005-2006
2004-2005
2003-2004
2002-2003
2001-2002
20
2000-2001
20
1999-2000
25
1998-1999
25
1997-1998
30
1996-1997
30
1995-1996
35
1994-1995
35
1993-1994
40
1992-1993
40
1991-1992
45
1990-1991
45
1.7 – Sweden and Finland saw their
labour force decline temporarily in the 1990s
Index 1980 = 100
Index 1980 = 100
112
112
Sweden
110
Finland
110
108
108
106
106
104
104
102
102
100
100
1980
1984
1988
Sources: OECD and Desjardins, Economic Studies
1992
1996
2000
2004
2008
1.8 – The increase in the number of births slightly increased
the fertility index
Index
In thousands
5.0
150
140
Births (left)
Fertility Index (right)
130
4.5
4.0
120
3.5
110
3.0
100
2.5
90
2.0
80
70
1.5
60
1.0
1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2008
Sources: Institut de la statistique du Québec and Desjardins, Economic Studies
1.9 – Can demographics prevent a contraction of
the labour pool?
¾
The number of births has increased significantly in recent
years. Too little, too late!
¾
Even a return to a fertility rate of 2.1 children per woman would
not prevent a decline in the working-age population for the
next fifteen to twenty years.
¾
Is international immigration a solution?
¾
The increase in targets will not be enough.
¾
The ISQ’s "strong" scenario of 60,000 immigrants per year
delays the decline in the labour pool from 2014 to 2019.
¾
The demographic trends are impossible to reverse.
1.10 – Solutions to mitigate the expected labour shortage
¾ Integrate a larger proportion of the population into
the labour market (people who are fit to work and
available).
¾ Encourage increased labour mobility among the
provinces.
¾ Facilitate the recognition of immigrants’ diplomas
and qualifications.
¾ Implement incentives to delay the retirement of
aging workers.
1.11 – The employment rate of those
aged 55 to 64 is relatively low in Quebec
In %
In %
90
90
80
80
70.3
69.3
70
66.3
70
62.1
58.2
60
57.7
57.5
56.4
53.8
60
53.6
50.2
50
50
38.2
40
34.4
40
0
0
Fr
It a
an
c
be
ue
Q
EC
O
y
er
m
nl
an
an
a
an
C
Fi
ad
k
ar
m
en
te
ni
U
G
K
d
D
gd
in
St
d
te
ni
U
om
es
at
pa
Ja
N
or
w
en
ed
Sw
Sources: OECD, Statistics Canada and Desjardins, Economic Studies
ly
10
ce
10
D
20
d
20
n
30
ay
30
1.12 – Life expectancy in Quebec is increasing
and is rapidly moving away from 65 years
Years
Years
90
90
Projections
85
Women
85
Men
80
80
75
75
70
70
65
65
1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016 2021 2026 2031
Sources: Institut de la statistique du Québec and Desjardins, Economic Studies
1.13 – Once the effects of the recession dissipate,
unemployment will decline under the weight of demographics
In %
In %
15
15
14
14
Projections
13
13
12
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
1976
1981
1986
1991
1996
2001
Sources: Statistics Canada and Desjardins, Economic Studies
2006
2011
2016
2021
2026
3
2031
1.14 – Will wages climb in Quebec?
¾ The services sector will be able to adjust more
easily.
¾ Businesses focused on foreign markets will have to
confront the competition.
¾ With the scarcity of labour, offshoring could
increase.
¾ To be sustainable, wage increases must be based
on productivity gains.
1.15 – Real wage growth is generally based on
productivity gains
In %
Average annual change between 2001 and 2007
5.5
Czech
Republic
4.5
Slovakia
Real wages
3.5
2.5
1.5
0.5
(0.5)
(1.5)
(1)
Norway
Iceland
Greece
Australia
U.K. Ireland
Sweden
Denmark
Finland
France
Canada
BelgiumUnited States
Switzerland
Netherlands
Quebec
Austria
Portugal
Luxembourg
Italy
Mexico
Japan
Spain
Germany
0
1
2
3
Hungary
South Korea
Poland
4
Productivity*
•Productivity equals output per worker, and wages are also calculated per worker.
Sources: OECD, Statistics Canada, Institut de la statistique du Québec and Desjardins, Economic Studies
5
6
In %
Part 1 – Summary: The impact of
the demographic shock on the labour market
¾ Quebec will age faster than its neighbours.
¾ The labour pool will decline within five years.
¾ The increase in the birth rate cannot reverse the trend
for the next ten to fifteen years.
¾ Higher immigration could only delay the phenomenon.
¾ The solution: Integrate more people into the labour
market.
¾ Wages will not necessarily increase more quickly:
Productivity will be the key factor.
Part 2 – Productivity will be the key
to prosperity for Quebec’s economy
¾ Failure to boost productivity guarantees weaker
economic growth.
¾ Productivity plays a central role in the economy.
¾ How can Quebec tackle the productivity challenge?
¾ Failure to boost productivity will lead to tough social
choices.
2.1 – Quebec’s economic growth will soon depend entirely on
productivity gains*
% ann. change
5
% ann. change
5
Productivity
4
Labour force
Projections
4
Real GDP
3
3
2
2
1
1
0
0
(1)
(1)
1968-1978
1978-1988
1988-1998
1998-2008
2008-2018
•Productivity is calculated as a residual (change in real GDP minus change in the labour force).
Assumption of constant productivity (1998-2008) was used for the projections.
Sources: Conference Board, Statistics Canada and Desjardins, Economic Studies
2018-2028
2.2 – Rise in labour productivity required to sustain
annual real GDP growth of 2%
% ann. change
% ann. change
2.3
2.2
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
2.3
2.2
2.1
2.0
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
2008
2010
2012
2014
Sources: Statistics Canada and Desjardins, Economic Studies
2016
2018
2020
2.3 – Productivity growth benefits society
¾ Increase in real wages for workers.
¾ Lower relative prices for consumers.
¾ Higher profits for businesses.
¾ Higher tax revenues for governments.
Increase in
productivity
Consumers
Paid workers
Businesses
Governments
Lower prices
Higher real
wages
Lower unit
costs
Higher tax
revenues
Higher profits,
greater
investment
Improved
public finances,
structural
investments
Improvement in
the purchasing
power
2.4 – Solutions to increase productivity
¾ Five main areas:
9 Business innovation
9 R&D spending
9 Capital investment
9 Education
9 Regulation
¾ Macro- and microeconomic solutions
Highly
competitive
U.S. companies
Increased
protectionism
measures
Adapted
business
strategies
Quebec
Quebec
businesses
businesses
Innovation
Innovation
Exchange
rate
fluctuation
Government policies
that encourage
innovation (taxation,
regulation, assistance
programs)
Sources: Thales Canada Inc. and Desjardins, Economic Studies
Government’s
role
Competition
from
emerging
countries
with low
labour costs
Businesses’
role
2.5 – Innovation is the only way out for Quebec business
2.6 – Contribution of innovation11
to economic growth
In %
3.5
In %
3.5
Average annual contribution between 1995 and 2006*
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
(0.5)
1
Estimated by multifactor productivity
* 1995 to 2005 for Austria, Denmark, Finland, the Netherlands, Portugal and the U.K.
Sources: OECD and Desjardins, Economic Studies
Italy
Spain
Denmark
New Zealand
Switzerland
Netherlands
Quebec
Canada
Ontario
Austria
France
Germany
Japan
Portugal
United Kingdom
Australia
United States
Sweden
Finland
Ireland
(0.5)
2.7 – First main lever: Business innovation
Observation:
¾ Québec still has certain deficiencies regarding education
How to do better:
¾ Must be an integral part of business strategies.
¾ Adopt better-adapted management practices.
¾ Involve employees more to encourage the emergence of ideas.
¾ Develop an action plan to leverage resources and knowledge apt to spur
innovation (talent management, targeted investments, key partnerships,
etc.).
¾ Develop new niches in order to stand apart on the world stage.
2.8 – Quebec ranks favourably at the international level for
R&D spending*
As a % of GDP
4.0
As a % of GDP
4.0
R&D spending
Sweden
Finland
Japan
Switzerland
United States
0.0
Quebec
0.0
Germany
0.5
Denmark
0.5
Austria
1.0
France
1.0
Canada
1.5
Belgium
1.5
United Kingdom
2.0
Netherlands
2.0
Australia
2.5
Norway
2.5
Ireland
3.0
Italy
3.0
Spain
3.5
Portugal
3.5
* Period from 2000 to 2006. For certain years, data was not available for Australia, Denmark, Italy, Norway, Sweden and
Switzerland.
Sources: World Bank and Desjardins, Economic Studies
2.9 – Second main lever: R&D spending
Observation:
¾ Quebec is faring quite well in this regard.
How to do better:
¾ Maintain the attractive tax system (tax credits).
¾ Go beyond research, find more interesting applications for businesses.
¾ Intensify partnerships between business and universities and research
laboratories.
¾ Conduct research and development in partnership with competitors as well
as suppliers and clients.
2.10 – Machinery and equipment investment
is weak in Quebec
As a % of GDP
12
As a % of GDP
12
11
10
11
Quebec
Canada
Ontario
United States
10
9
9
8
8
7
7
6
6
5
5
4
4
1991
1993
1995
1997
1999
2001
Sources: Statistics Canada, Datastream and Desjardins, Economic Studies
2003
2005
2007
2.11 – Third main lever:
Machinery and equipment investment
Observation:
¾ Quebec lags behind both at the global and North American levels.
How to do better:
¾ Review our tax system in order to encourage more investment:
9 Quickly eliminate the tax on capital;
9 Reduce public costs not related to business profits.
¾ Show and promote the need for long-term machinery and equipment
investments.
2.12 – Education level of those 25 years and over:
Quebec’s performance leaves much to be desired
In %
50
In %
50
45
Quebec
Canada
45
40
Ontario
United States
40
35
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
No high school diploma
Sources: Statistics Canada, U.S. Census Bureau and Desjardins, Economic Studies
University degree
2.13 – Fourth main lever: Education
Observation:
¾ Quebec still has a way to go regarding education.
How to do better:
¾ Improve student retention among our youth.
¾ Make education a top priority again through greater funding at all levels,
particularly of universities.
¾ Invest in professional development in order to update knowledge and
monitor new developments.
¾ Encourage immigration of needed skilled workers.
¾ Improve recognition of the skills of immigrant workers.
2.14 – Fifth main lever: Regulation
Observation:
¾ Quebec ranks last among Canadian provinces regarding the relative cost of
regulation.
How to do better:
¾ Ease the administrative burden on businesses.
¾ Maintain adequate regulation to encourage research and investment.
¾ Set up the conditions needed to make the labour market more flexible.
2.15 – There are a number of ways to increase productivity
Macroeconomic solutions:
¾ Reform taxation.
¾ Simplify regulation.
¾ Improve support to education at all levels.
¾ Invest in capital (machinery and equipment).
Microeconomic solutions:
¾ Management practices that foster innovation.
¾ Leverage employee creativity.
¾ Invest in professional development.
¾ Increase research and development, and find the best applications.
Summary – Action must be taken in order to soften the
impact of the demographic shock on our economy
¾ The demographic trends are impossible to reverse.
¾ As many people as possible must be integrated into the
labour market.
¾ An extended working life would be consistent with the
increased life expectancy.
¾ Demographic shifts create a challenge for the labour
market, economic growth and especially management of
public finances.
Quebec’s future prosperity depends on accelerating
productivity: a number of means must be implemented to
achieve it.