Reports 2013/09

Basis for assessment of the long run labour supply potential in Norway

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This report surveys conditions which should be taken into account when preparing long run employment projections. Specifically, it is intended to be relevant for the Ministry of Finance in the preparation of the White paper on long run economic perspectives published in 2013. In line with economic growth theory, the report presumes that the long run trend in future employment is basically determined by labour supply. The causes behind changes in aggregate labour supply can be put in three main categories: 1) demography, i.e. changes in the number of inhabitants in working age; 2) composition effects, i.e. changes in the distribution of the population in working age on groups that are significantly different with respect to individual labour supply; 3) changes in economic and other incentives affecting individual labour supply. This report concentrates on points 2 and 3.

Most long run projections use historical trends as a point of departure. Should historical trends be prolonged, or are we aware of changes which imply breaks and modifications? A relevant example of a likely trend change is female labour supply. There is clear evidence that the potential for further convergence between the labour supply of males and females is nearly exhausted in Norway. Chapter 2 shows the main trends from 1930 till today in aggregate figures of the labour force, participation rates, employed persons, man hours and average working hours. It provides a quantified picture of how reduction in average working hours has had a stronger impact on man hours per person in working age than the increase in the average employment share. The chapter also compares participation rates, employment rates and working hours in Norway and a selection of other OECD countries. However, a complete review of the causes to historical changes and differences across countries lies beyond the scope of this report.

Assessing the potential for composition effects on aggregate future labour supply requires information about the variation in labour supply within different population groups. Chapter 3 shows how labour supply in the groups of, respectively, elderly, women, small child parents, and immigrants deviates from the total average. Also these deviations are compared over time and between countries. Chapter 4 takes a closer look at the transition from education to work, and retirement from work to disability or old-age pensions. Chapter 5 provides a survey of the micro-econometric labour supply literature, which studies individual labour supply responses to changes in economic incentives. For males the estimated uncompensated wage elasticities of labour supply lie in the vicinity of 0.1. Females, especially the married ones, are still found to be a bit more responsive than males. Chapter 6 reviews in some detail how long run employment projections are conducted in some international institutions doing this quite regularly. Chapter 7 presents the employment effects of changes in migration and integration of immigrants. Due to the strong increase in immigration to Norway after 2004, these effects will be faced by any who projects employment in the Norwegian economy. Chapter 8 summarizes the report, identifies sources to future changes in the potential employment in Norway, and gives some recommendations for employment projections.

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