Composition of the increase in the labor force participation rate during the first decades of the century
Excerpt from the Fiscal Survey and collection of research issues:
· The most significant increase in the past decade took place among the higher ages, mainly among Jewish men aged 60–69, among non-Jewish men aged 55–59, and among women aged 55–64.
· Since participation rates decline with age, they have declined as a result of the aging of the working-age population. However, older adults have increased their participation rates to a larger extent, so the over-all participation rate has actually increased.
· Until the beginning of this century, the participation rate among men declined over a number of decades. The increase in the past decade is mainly a result of the increase among older adults. The participation rate among women has increased constantly, in accordance with the global trend, but since 2003, a large part of the increase is a result of the increase in the participation of older women.
· The analysis shows that the participation rate among older adults increased in the past decade, largely a result of the fact that the retirement age was increased gradually since 2004, since this encourages older population groups to participate in the labor market. Increasing the retirement age therefore contributed to the income of the elderly population and to their pensions. It has apparently also made a considerable contribution to economic growth in the past decade.
The labor force participation rate in Israel among the primary working ages (25–64) has been in an upward trend in recent decades, and today stands at 80.7 percent—higher than the OECD average. According to an analysis by Aviad Schwartz of the Bank of Israel Research Department, the increase this century has been a result of different factors than those that led to increases in the past.
Over the years, the participation rate among women at any given age has increased together with their year of birth—meaning women from later cohorts have a higher participation rate. But this increase has narrowed over the years, and there is currently no large difference between cohorts in the younger age range. Conversely, the participation rate among men declined in the later decades of the 20th century, but starting in 2005 there was a turnaround, and it is currently in an upward trend. As a result, the Bank of Israel conducted an analysis intended to clarify what is currently leading to the increase among women, what is leading to the change in trend among men, and how those changes are affected by changes in policy.
One of the most significant policy changes concerns the fact that since 2004, the retirement age has increased gradually, from 60 to 62 for women and from 65 to 67 for men. When the participation rate is broken down by age (see the figure), the sharpest increase is found among older workers. The increase is most prominent in the age groups that were directly affected by the increase in the retirement age, but there is also a marked increase among those nearing retirement age, meaning those at ages where the participation rate begins to decline. Previous studies and the current analysis show that the increase in the participation rates of older adults is not a result of changes in their characteristics over the years, but rather of the increase in the retirement age.
The increase in the participation rates of older adults had a significant effect on the overall participation rate in the economy. A basic estimation shows that older adults contributed about half of the increase in the participation rate of women, and almost all of the increase in the participation rate among men, despite the fact that the older adult population accounts for about 10 percent of the primary working age population. As such, not only did the increase in the retirement age increase the income of the older adults themselves, but it also contributed significantly to economic growth in the past decade.