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April 30, 2012 | by  | in Opinion |
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C.R.E.A.M. – The Great Stagnation

The post WWII era between 1945-2008 was a triumph for Western liberal capitalism. The developed world has achieved something unprecedented in human history: 60 years of stability and near uninterrupted economic growth which has brought the bulk of our populations into the middle class. But the 2008 global recession and lacklustre recovery have raised questions about the continued ability to generate high economic growth in the West. People have responded to this by fundamentally calling into question our economic system, but there is a simple and unavoidable reason that this lack of growth is happening and is likely to continue.

A major driver of continued economic growth has been increased labour force participation (the percentage of the population either employed or looking for a job). This has been driven by two factors: First, female labour force participation has steadily increased since WWII due largely to changing social attitudes. Just 28.4 per cent of women were part of the labour force in 1951, but that had reached 56.4 per cent by 2001, about 20 per cent below male labour force participation. The gap has narrowed to around 10% since then. The downside for the future is this: there isn’t much more growth to come simply by empowering women to join the workforce, the gap is unlikely to shirk much further.

The second factor has been favourable demographics as a result of the post- WWII baby boom, meaning more people of a working age. However, the demographics are changing; the baby boomers are retiring and soon a far higher percentage of our population will be over the age of sixty-five. Because of higher life expectancy people are working later into life, but this won’t be enough to make up the difference. And the gains there are offset by lower participation among under- 25s as we stay in full time education longer. The Department of Labour estimates that the overall effect of this is a decline in labour force participation from nearly 69 per cent currently to just over 63 per cent by 2050. A further issue is that people are working shorter hours: The average hours worked per person per week has decreased by about 1.5 hours over the last 20 years and is likely to continue to decline.

Unfortunately these trends, unlike the financial crisis, are here to stay even if we reform our outdated entitlement systems. Raising the retirement age would be a start. The good news is that we’re better off than most of the developed world. As of 2008 we had the 4th highest labour force participation in the OECD (even better than Finland who only managed 6th, suck on that!). Unsurprisingly Greece and Italy round out 2 of the bottom 4 spots, and their numbers have declined dramatically since then.

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