1. Introduction

The participation rate underwent an unprecedented fall during the last recession and the subsequent slow recovery, declining a total of 3 percentage points from peak to trough. In all likelihood, the participation rate decline reflects a combination of both cyclical and structural factors.

The extent to which the fall in the Canadian participation rate is structural has major policy implications in the short term as well as in the longer term. In the short term, it will have an impact on the estimated output gap and, hence, the appropriate conduct of monetary and fiscal policies. A higher structural participation rate will mean that the economy has more room to grow over the short to medium term before running against its sustainable, non-inflationary level of output, but also that the unemployment rate will fall only slowly and gradually.

In the longer term, a continued decline in the participation rate due to structural factors will exert downward pressures on potential output, the employment ratio and GDP per capita. It is relatively well known that the ageing of the "baby-boom" generation over the next decades will tend to significantly depress source population growth and, hence, potential output growth, while increasing dependency ratios. At issue here is the strong possibility that these downward pressures on growth will be compounded by a falling participation rate.

The key issue is to know how much of the downturn is purely cyclical and how much is structural. In order to highlight this issue, we use a simple, accounting framework that combines plausible trend participation rates for 16 demographic groups with source population data to estimate an aggregate structural participation rate for the Canadian economy. Moreover, the analysis is not confined only to the assessment of the current structural participation rate in the Canadian economy, but also to its prospects over the next four decades.

In contrast to the conventional wisdom that the ageing of the population will start to dampen the aggregate participation rate only when "baby-boomers" start to retire in a couple of decades, our results show that the ageing of the population has already started to exert downward pressures on the aggregate participation rate. This results from a trend towards increased life expectancy, which in and of itself will result in a trend increase in the proportion of the working-aged population aged 65 and over. Although the trend towards an older working-aged society was masked by the entry of "baby boomers" in the labour market in the 1970s and early 1980s, since mid-1980s the underlying downward pressures associated with an older society dominate again. As a result, the retirement of "baby boomers" will not start but rather intensify a downward trend in aggregate participation.

The rest of this paper is organised as follows. Section 2 presents the population accounting framework used in the paper as well as a "demographic composition effect" that can be derived from that framework. The demographic composition effect in Canada since 1921 as well as the expected effect to 2040 is presented in section 3. Section 4 documents working assumptions on individual trend participation rates over recent history and to 2040. Section 5 discusses the aggregate participation rate resulting from these assumptions on individual participation rates, together with actual and projected population data, over the 1976-2040 period. Section 6 compares Canadian and the U.S. experiences through the 1990s and highlights the fact that the two countries were affected in a very different way by the demographic composition effect over that period. Section 7 provides some concluding remarks.

2. An Accounting Approach

MacGregor and Mang (1996) suggest a simple accounting framework to calculate the trend participation rate at the aggregate level. The approach is based on the idea that changes in the aggregate participation rate reflects changes in the participation rate of individual age-sex cohorts as well as changes in the importance of each of these cohorts in the source population. More formally, we have:

1. 
2. 

where PR_t is the aggregate participation rate in year t, PR_it is the participation rate of cohort i in year t, and w_it is the share of cohort i in total source population, SP_t, in year t. The trend aggregate participation rate (PRT_t) in year t is defined as:

3. 

where PRT_it is the trend participation rate of cohort i in year t. This paper uses the framework described by (3) to estimate the aggregate trend participation since the mid-1970s (when the current Labour Force Survey do begin) as well as to assess its prospects over the next four decades. The estimated trend participation rate is based on plausible assumptions about the trend participation rates of 16 demographic groups—10-year gender-specific cohorts are used ², except for youths and older people where 5-year cohorts are used. Source population series are taken from actual population data and Statistics Canada’s moderate growth projection (Scenario 2) ³. Between 1976 and 1989, 16 individual trend participation rates are obtained from an HP filter. After the 1990s, trend participation rates are based on the results of econometric and descriptive studies or on a comparison with U.S. participation rates of similar demographic groups.

A small number of econometric studies have analysed the participation rate behaviour in the 1990s for detailed Canadian age-sex cohorts. Moreover, some of these have examined only the youth participation rate (Archambault and Grignon (1998), Rose (1994)), although there are also some studies that have examined a broader range of demographic groups (Coletti, Crawford and Maclean (1996), Fortin and Fortin (1997)). ⁴

As suggested by Rubin and Lester (1997), Ip et al. (1997) and Haritos (1998), the U.S. experience also provides useful information to benchmark trend participation rates for various demographic groups in Canada. In contrast to previous decades, business cycles in Canada and the U.S. have diverged in the 1990s. As a result, labour market indicators have also diverged; particularly the participation rate, which has risen to a record level in the U.S. while it has trended down in Canada. With the U.S. economy now at or above potential, U.S. participation rates are likely free of important cyclical factors, revealing underlying changes in structural participation rates of individual age-sex cohorts. This suggests that the actual U.S. participation rates for detailed demographic groups can be used to gauge the structural participation rates for comparable demographic groups in Canada.

One advantage of the framework used here is its ability to capture the effects of ongoing demographic changes on the aggregate participation rate. In our framework, structural changes in the aggregate participation rate reflect either changes in individual trend participation rates or a change in the composition of the source population for given individual participation rates—the demographic composition effect. It is convenient to define the demographic composition effect with the following:

4. 

which is the aggregate participation that would have been observed at time t if all individual participation rates would have remained at their 1989 levels. The annual average demographic composition effect between year t and t+k is then simply defined as:

5. 

3. What we Know More About: The Demographic Composition Effect

Before moving to the examination of participation rates for individual age-sex cohorts, we first want to highlight ongoing demographic changes in the Canadian economy and their impact on the aggregate participation rate (Table 10). The demographic composition effect has displayed two distinct phases since the early 1970s. ⁵ Between 1970 and 1985, the effect of the demographic evolution on the participation rate has been roughly neutral on average. However, since the mid-1980s the demographic composition effect has had a negative impact, removing about 1¼ percentage points from the participation rate. From its peak level in 1989, the demographic composition effect has already removed almost 1 percentage point from the participation rate in 1997. Moreover, the demographic composition effect will continue to be negative for many decades, removing an additional 8.5 percentage points from the structural participation rate by 2030. In the next four decades or so, the annual demographic effect will increase to a peak of about –0.35 percentage point per year in 2015, compared to –0.14 percentage point in 1997, before falling gradually to about –0.04 percentage point per year in 2040.

A detailed decomposition of the demographic composition effect is presented for the 1989-1996 period in Table A1 in the annex. It shows that the lower contribution to the aggregate participation rate from younger cohorts has been only partially offset by higher contributions from older cohorts. Most important, the share in source population of people aged 70 and over increased by 1.4 percentage points but had a negligible effect on the aggregate participation rate given their very low participation rates.

Table 1

Annual Average Demographic Composition Effect, Canada, 1921-2040

(percentage points)

Period	Effect	Period	Effect	Period	Effect
1921-1930	-0.104	1960-1970	-0.105	2000-2010	-0.210
1930-1940	-0.122	1970-1980	-0.008	2010-2020	-0.335
1940-1950	-0.095	1980-1990*	-0.032	2020-2030	-0.229
1950-1960	-0.048	1990-2000	-0.119	2030-2040	-0.086

* Between 1980 and 1985 the annual average demographic effect was positive at 0.016 percentage point, while it was negative between 1985 and 1990 at –0.079 percentage point.

Table 2

Age Composition of Working-Aged Population, Canada, Selected Years:1921-2041

Year	Share of Population aged (per cent):
	15-24	25-54	55-64	65-69	70+	Males, 70+	Females, 70+
1921	26.3	57.3	9.0	3.0	4.3	2.2	2.1
1931	27.5	55.0	9.3	3.3	4.9	2.4	2.4
1941	25.9	53.8	11.0	3.7	5.5	2.8	2.8
1951	22.0	55.8	11.0	4.4	6.7	3.3	3.4
1961	21.7	56.0	10.7	4.0	7.5	3.6	3.9
1971	26.4	50.9	11.3	4.0	7.3	3.2	4.2
1981	25.2	51.2	11.3	4.4	7.9	3.2	4.7
1991	18.1	56.6	10.9	4.9	9.5	3.8	5.7
2001	16.5	56.4	11.5	4.5	11.2	4.5	6.7
2011	15.7	52.3	15.1	5.3	11.7	4.8	6.9
2021	14.0	48.0	16.7	6.8	14.5	6.2	8.3
2031	13.5	46.3	14.4	7.4	18.4	7.9	10.5
2041	13.4	45.4	14.4	6.5	20.3	8.6	11.7

The negative demographic composition effect is not a new phenomenon. Indeed, Table 1 demonstrates that the period between 1970 to 1985 is the anomaly. Aside from this period, the demographic composition effect has put downward pressures on the aggregate participation rate since the 1920s. This downward trend in the demographic composition effect reflects continuous increases in the share of older people in the working-aged population, particularly for females aged 70 and over, which, in turn, mirror the increase in life expectancy experienced since the 1920s (Table 2). The pause observed in the 1970s and early 1980s reflects the temporary offsetting effect of baby boomers who were entering into the workforce (see Chart A17 in Annex).

4. What we Know Less About: The Structural Levels of Individual Participation Rates

To complete the analysis, the trend or structural participation rates for the 16 demographic groups identified in the analysis are specified. Actual participation rates of the 16 age-sex groups in Canada and the U.S. over the 1976-1997 period are plotted in Charts A1 to A16 in Annex.

The first observation that can be made from these charts is that youth participation rates appear to be sensitive to aggregate cyclical downturns, while adult participation rates appear to be mainly driven by structural factors. A noticeable exception to this rule, however, is the participation rate of adult males aged 25-34, which seems to be more sensitive to business cycles than participation rates of other adult cohorts ⁶, particularly in the 1990s. Most empirical analysis has confirmed that participation rates for youths are very sensitive to business cycles or employment opportunities but have had trouble identifying a robust cyclical effect for adult cohorts. The exception is Fortin and Fortin (1997) who have concluded that, with the exception of prime-aged males, adult participation rates are as much or even more sensitive to business cycles than youth participation rates.

This last conclusion is difficult to reconcile with the graphical evidence. The source of the confusion seems to be the variable Fortin and Fortin (1997) used to capture business cycles or job opportunities in these empirical studies: the ratio of employment to source population. The employment-to-population ratio is not a measure of the imbalances between the demand and the supply of labour but the endogenous result of the interaction between them. To capture the business cycle a measure of the level of the employment consistent with the underlying potential supply of labour in the economy—"the natural rate of employment"—is needed.

This measurement of business cycles or job opportunities is particularly troublesome when applied to a specific demographic group in which the participation rate of that group is regressed, inter alia, on its own employment-to-population ratio as in Fortin and Fortin (1997). Clearly, the two variables will be strongly correlated since they are linked by the following identity: E/SP = (1-UR)(L/SP) where E is employment, SP is source population, UR is the unemployment rate, and L is labour force. This does not mean that the participation rate of that demographic group is sensitive to business cycles or job opportunities. Indeed, it is easy to imagine an example in which employment-to-population ratio and participation rates are strongly correlated because they both trend up or down, driven only by structural factors. In that context, the approach used by Fortin and Fortin (1997) will wrongly suggest that the participation of that cohort is very sensitive to job opportunities or to the business cycle.

Youth Participation Rates

The decline in youth participation rates in the 1990s has been particularly severe. Since 1989, the youth participation rate declined almost 8 percentage points. The participation rate for adults, in contrast, declined only 1.4 percentage points over the same period. As noted above, this is partly because youths tend to be more sensitive than adults to business cycles in their decision to participate in the labour force. In the 1990s the decline has been shared by students and non-students but has been more pronounced for youths aged 15-19, which are more sensitive to cyclical economic downturns.

Recent studies suggest that half of this decline in youth participation reflects cyclical factors that will be reversed as job prospects improve, while the balance is likely to be structural (Rose (1994), Jennings (1997), Archambault and Grignon (1998)). One key factor that has reduced youth participation in the 1990s is the increase in school enrolment. The proportion of those aged 15-24 attending full-time school has increased by more than 10 percentage points since 1989, reaching 58.2 per cent in 1997. Youths attending school participate less in the labour market than youths not in school. Therefore, an increase in school enrolment rates reduces the overall youth participation rate. Moreover, the results of Archambault and Grignon (1998) suggest that most of the increase in school enrolment observed in the 1990s is structural as opposed to a temporary response to weak labour market conditions. Their results show also that a less generous UI/EI system and higher relative minimum wages ⁷ have reduced structural participation rates of both student and non-students. Therefore, in line with recent empirical evidence, the current analysis assumes that half of the decline in youth participation rates reflects cyclical factors, while the other half reflects structural factors.

Prime-aged adults

The participation rate of prime-aged men (those aged 25 to 54) has declined in the 1990s, continuing the downward trend observed in the 1980s. The decline was more pronounced than in the U.S. for men aged 25 to 34, but similar to that in the U.S. for those aged 35-54. This suggests that most of the fall in the participation rate of prime-aged men was structural, although some cyclical effects should have play a role for those aged 25-34.

Looking ahead, there is a great deal of uncertainty surrounding the evolution of the participation rate of these cohorts, since it is unclear if the downward trend is completed. The current analysis assumes that the trend participation rate for those aged 35-54 is near the actual participation rate level and will remain there until the end of the projection period. In contrast, it is assumed that the trend participation rate for males aged 25-34 is about 1 percentage point higher than the actual rate but lower than the U.S. rate for the same age group.

The participation rate of prime-aged women (those aged 25 to 54) stopped rising at the end of the 1980s and the outlook for their participation is somewhat uncertain. On the one hand, their participation has shown little, if any, sensitivity to the business cycle. On the other hand, participation rates for prime-aged women in the U.S. have recently started to rise again. However, this is in the context of a very tight labour market, rising real wages, a reduction in welfare generosity, and from lower participation rates than in Canada for women aged 25 to 44. Our working assumptions for prime-aged women is for a gradual increase of trend participation rates to 80 per cent over the projection period. Compared to actual participation levels, this represents a modest increase for women aged 25-45 but a significant increase for those aged 45-54 (7.6 percentage points). The latter would represent a "cohort effect as younger generations of women with demonstrated strong attachment to the labour market replace older generations who never had such a strong attachment.

Older People

As for prime-aged adults, the recent evolution of participation rate for older people (those aged 55+) is different for males and females. The participation rate of older males has declined in the 1990s, continuing the downward trend observed in the two previous decades. The decline in participation rates of older males is, indeed, part of a long-standing trend that began in the 1950s. In contrast, in the last two decades, participation rates of older females have increased for those aged 55-64, while they have declined slightly for those aged 65 and over.

The introduction of public pension plans (CPP/QPP) in the mid-1960s (which amounted to a significant windfall gain to the first recipients) and the increased share of the population covered by private pension plans have without undoubtedly played a key role in reducing the labour market participation of older males. The increased presence of pension plans may also have played some role in keeping participation rates of females over the age of 65 from rising despite the long-standing increase in the participation of females aged 25-65. Moreover, as shown by Italiano (1996), defined-benefit private and public pension plans are structured to make early retirement attractive by providing some net wealth gains for those who retire before the age of 65.

In addition to this trend decline in the participation rates of older workers, a considerable difference exists between Canadian and American participation rates for older people. The participation rates for older cohorts, both males and females, are much higher in the U.S. than in Canada. The difference is particularly striking for males and females aged 65-69 and for females aged 55-64 where the difference peaks at 13 percentage points. For males aged 55-64 Canadian participation rates were above U.S. rates between the mid-1970s and the end of the 1980s, when Canadian rates began to fall below U.S. rates.

The higher participation of older people in the U.S. seems to be explained by differences in the social safety net and educational attainment. First, as noted by Haritos (1996), the higher participation rate of older Americans may be traceable to the less pervasive social safety net in the U.S. For example, the lack of universal heath care coverage in the U.S. together with its high cost may force older Americans to work longer. ⁸ While Americans are eligible for Medicare at the age of 65, it is less comprehensive than Canadian medical insurance, covering less than 50 per cent of the medical expenditures. Gruber and Madiran (1995) concluded that introducing universal health-insurance coverage in the U.S. could lead to a large increase in the early retirement rate.

Second, older Canadians tend to be less educated than their American counterparts. A higher proportion of Americans over the age of 55 have completed university or have high school education whereas in Canada there is a higher proportion of people with either an elementary or incomplete post-secondary education (Table 2). Since participation rates are positively related to education, the fact that older peoples are less educated in Canada than in the U.S. may account for some of the participation gap between the two countries (Table 3).

In order to assess the impact of education on the participation rate differential between Canadian and U.S. older peoples, a participation rate series combining the educational attainment distribution of older Americans and the education-specific participation rates of Canadians aged 55 and over has been calculated. The resulting series is plotted with actual participation rates of older Canadians and Americans in Chart A18 in Annex. Although the education-adjusted Canadian participation rate still lies below the U.S. participation rate in recent years, it is equal or above the U.S. rates over the 1976-1987 period, suggesting that educational attainment is an important source of the difference between participation rates of older Canadians and Americans.

Table 3

Years of School Completed, 1996, Canada and the U.S.

(per cent)

	Elementary	High School Education	Some Post-Secondary	University Degree
	Prime-Aged 25-54 Cohort
Canada	6.0	35.7	39.8	18.5
U.S.	4.6	41.2	27.5	26.8
	Older 55+ Cohort
Canada	32.0	36.5	23.1	8.5
U.S.	15.8	49.4	18.3	16.5

 

Table 4

Participation Rate of Canadians aged 55+ by Education Level, 1997

(Per cent)

Elementary	High School Education	Some Post-Secondary	University Degree	Average
13.0	23.4	31.8	44.2	24.2

 

One would expect a narrowing of the participation rate gap between Canadian and American older peoples as younger and more educated Canadians age. As shown in Table 2, prime-aged Canadians are almost as educated as their U.S. counterparts. The proportion of those aged 25-54 that has only elementary education is similar in both countries, while a lower proportion with a university degree in Canada than in the U.S. is partly offset by a higher proportion with some post-secondary education. In the longer term, education prospects may even be better because the proportion of young Canadians attending school has increased from 45.4 per cent in 1984 to 60.0 per cent in 1996, while in the U.S. the enrolment rate increased less over the same period, from 43.1 per cent to 53.6 per cent. ⁹ Moreover, the fact the younger generations are more educated than previous generations suggests that the narrowing of the older cohort’s participation gap between Canadians and Americans may be accompanied by an increase in participation rates of older people in both countries.

The fact that Canada is gradually becoming a more educated society suggests that very long-term prospects for participation rates of older cohorts are brighter than one would conclude by looking only at recent trends. However, we are reluctant to apply this "optimism" to our participation rate projection for many reasons. First, although the higher educational attainment of Canadians aged 25-54 may affect positively the participation of older cohorts in coming decades, higher school enrolment rates among youths will not affect the participation rates of the cohort aged 55 and over for three to four decades. Second, the process by which Canadians are becoming more educated has not started recently: the level of educational attainment of older Canadians? as well as the entire Canadian society? has been increasing for several decades, while their participation rates have been trending down. As noted above, other factors have played an important role in that decline—private and public pensions, social safety net, and higher net wealth—and it is not clear that the effects of these factors have come to an end.

This is why we have not assumed any major increases in older trend participation rates over the projection period in the baseline projection. A noticeable exception is the participation rate of females aged 55-65, which is assumed to continue is upward trend as younger women with higher lifetime participation rates enter that cohort. The trend participation rates of other older cohorts are assumed to roughly remain at their actual levels. In order to assess the impact of this hypothesis on our results, an alternative scenario, in which the participation rates of older Canadians—aside from females aged 55 to 64—increase gradually to close all of their actual gaps with comparable U.S. rates by 2040 is also provided in the next section (see Charts A11 to A16 in the Annex for the profile of these alternative participation rates for older cohorts).

5. Aggregate Trend Participation Rate

The total-economy trend participation rate calculated from these individual participation rates and source population data is plotted in Chart 1. For 1997, the estimated series suggests a trend participation rate of 66.2 per cent, 1.4 percentage points higher than the actual participation rate of 64.8 per cent. This suggests that roughly half of the decline in the aggregate participation rate since the last recession is structural while the other half is cyclical. Our current estimate of the structural level of the participation rate is higher than the estimate of MacGregor and Mang (1996), similar to the estimate suggested by the aggregate equation of Fortin and Fortin (1997) ¹⁰, and lower than the estimate of Rubin and Lester (1997).

More important, looking ahead, the trend participation rate will continue to fall gradually as a result of downward pressures from demographic changes. By 2015, it is estimated that the trend participation rate will be about 63 per cent, down more than 3 percentage points from the current trend level, and a rate similar to that observed in the late 1970s. The participation rate stabilizes only by the late 2030s at about 58 per cent, down more than 8 per cent from the current trend level, and a rate similar to that experienced in the early 1970s but also in the 1920s and 1930s.

An alternative scenario, in which the participation rates of older Canadians—aside from females aged 55 to 64—increase gradually to close all of their actual gaps with comparable U.S. rates by 2040 is also presented in Chart 1. Assuming that older Canadians will increase their participation in the labour market in the coming decades reduces somewhat the extent of the fall in the aggregate participation rate but does not change the overall conclusion of the analysis. By 2040, the participation rate in the alternative scenario is 60 per cent, compared to 58 per cent in the basecase scenario.

6. On the U.S. Experience

A comparison of the demographic composition effect in Canada and the U.S. between 1960 and 2010 is presented in Table 5. As it is the case in Canada, the demographic composition effect tended to subtract from the aggregate participation rate since the 1950s and will continue to do so in coming years. However, the magnitude of the demographic composition effect differs in the two countries depending on the period considered. In the 1950s and 1960s changes in the age composition of the population were exerting more downward pressures on the aggregate participation rate in the U.S. than in Canada. In the 1970s demographics began to have less of an impact on the participation rate in the U.S. than in Canada. Indeed, in the 1980s, changes in the age composition of the population added 0.7 per cent to the U.S. participation rate, while they removed 0.3 percentage point to the Canadian participation rate.

Table 5

Annual Average Demographic Composition Effect, Canada and the U.S., 1950-2010

(Percentage points) ¹

Period	Canada	U.S.
1950-1960	-0.048	-0.204
1960-1970	-0.105	-0.135
1970-1980	-0.008	-0.001
1980-1990	-0.032	0.073
1990-2000	-0.119	-0.022
1990-1997	-0.116	-0.010
1997-2000	-0.127	-0.048
2000-2010	-0.210	-0.151

¹ The demographic composition effect for the U.S. was calculated by holding the participation rates for the 14 individual age-sex groups constant at their 1989 values, and aggregating them using civilian population weights. For each cohort, the civilian population was obtained as the ratio of the labour force to the participation rate. Because of data availability, the two older cohorts—65 to 69 and 70 and over—were combined together, reducing the number of cohorts to 14.

The demographic composition effect continued in the 1990s to affect the Canadian economy more than the U.S. economy. While the demographic composition effect removed almost 1 percentage point to the Canadian participation rate between 1990 and 1997, it has removed less than 0.1 percentage point to the U.S. rate. As in Canada, the composition of the U.S. source population shifted from those aged under 34 to those aged 35 and over during the 1990s. In contrast to the Canadian experience, however, the change in age-sex composition of the source population in the U.S. exerted almost no downward pressures on the aggregate participation rate. This is because Canada experienced a much larger increase in the proportion of the source population aged 65 and over than the U.S. in the 1990s. The proportion of the source population aged 65 and over increased 1.3 percentage points in Canada between 1989 and 1996, but increased only 0.2 percentage point in the U.S. (Table A2 in the Annex).

The divergence in the timing of the demographic composition effect between the U.S. and Canada reflects the fact that the U.S. became an older society faster than Canada. Between 1950 and 1970, the proportion of the population aged 65 and over increased from 10.8 per cent to 13.9 per cent in the U.S., whereas in Canada it increased only from 10.9 per cent to 11.4 per cent. In the 1970s the share of older people in the population began to increase more rapidly in Canada, allowing an almost complete catch-up to the U.S. level. Between 1970 and 1997, the proportion of the population aged 65 and over increased from 11.4 per cent to 15.3 per cent in Canada, while it increased only from 13.9 per cent to 15.8 per cent in the U.S.

Looking ahead, the demographic composition effect will also increase in the U.S. but will remain less of a drag on the aggregate participation rate than in Canada. This reflects the fact that Canada is expected to become an older society than the U.S. with its share of those aged 65 and over in the population increasing to 16.7 per cent by 2010, compared to 16.1 per cent in the U.S.

7. Concluding Remarks

Clearly, the respective roles of cyclical and structural factors underlying the evolution of participation rates is the subject of considerable uncertainty, but we hope to have highlighted the issue by using a simple population accounting framework. We have focused on demographic changes that are the most certain component of any participation projection. In that respect, the conventional wisdom is that the ageing of the population will start to dampen the aggregate participation rate only around 2010 when the leading edge of the "baby boom" generation will start to retire. In contrast, our results indicate that the retirement of "baby boomers" will not start but rather intensify a downward trend in aggregate participation related to longer life expectancy.

As a result, our calculations suggest that the structural participation rate has been trending down since 1989 and will continue to do so in coming decades. Although our estimated trend participation rate is dependent on the assumptions underlying individual trend participation rates or the population projection, the overall downward profile obtained in this paper is robust with respect to any set of plausible assumptions.

As noted in the introduction, the current value of the trend participation rate has some short-term implications for the conduct of fiscal and monetary policies. In that respect, it is important to know if our current estimate of the aggregate participation rate is "optimistic" or "pessimistic". A check on our results suggests that our estimate of the trend participation rate may be "too" optimistic. Since the third quarter of 1996 and for 6 quarters in a row real GDP growth has averaged 4 per cent at annual rate, the unemployment rate has fallen almost 1.5 percentage points (reversing almost 40 per cent of the increase in the early 1990s), while the aggregate participation rate has been relatively stable at about 64.8 per cent. This may suggest that the Canadian structural participation rate is already below 66 per cent. This may be viewed as a positive or a negative development. On the negative side, a lower trend participation rate means a lower output gap and less room to grow in the near term. On the positive side, a lower trend participation rate may suggest a more substantial fall in the unemployment rate in coming years for a given path in growth.

The fact that Canadians are less likely to participate in the labour market with the passage of time has direct implications for the design of current and future policies. This is because most feasible policies will affect participation only with long lags—education, social programs, pension systems. Considering pension systems for example, it is probably not just a question reducing economic incentives to early retirement but also moving towards a more flexible labour market in which gradual retirement is possible rather than "forcing" workers into the binary choice of working full time or not working at all. In that respect, additional economic research should be devoted to understanding the determinants of labour market participation of various demographic groups and particularly older people aged 55 and over, who will account for 40 per cent of the population in thirty years.

Table A2: Detailed Demographic Composition Effect, United States, 1989-1996

	1989 Participation Rate        (1)	1989 Source Population Weights        (2)	1989 Contribution to Aggregate Participation Rate              (1)*(2)	1996 Source Population Weights        (3)	1996 Contribution to Aggregate Participation Rate with 1989 Cohort Rates  (3)*(1)	1989-1996 Changes in Weights        (4)=(3)-(2)	Contribution to the Change in Aggregate Participation Rate with fixed 1989 cohort rates  (5)=(4)*(1)	Cumulative Contribution          S (5)
Men 15-19	57.8	3.83	2.21	3.79	2.19	-0.05	-0.03	-0.03
Women 15-19	54.0	3.80	2.05	3.66	1.97	-0.14	-0.08	-0.10
Men 20-24	85.2	4.69	4.00	4.29	3.66	-0.40	-0.34	-0.44
Women 20-24	72.4	4.98	3.61	4.39	3.18	-0.59	-0.43	-0.87
Men 25-34	94.5	11.31	10.68	9.86	9.31	-1.45	-1.37	-2.24
Women 25-34	73.5	11.68	8.58	10.21	7.50	-1.47	-1.08	-3.32
Men 35-44	94.5	9.43	8.92	10.58	10.00	1.14	1.08	-2.24
Women 35-44	76.0	9.87	7.50	10.90	8.28	1.03	0.78	-1.45
Men 45-54	91.1	6.43	5.86	7.81	7.12	1.38	1.26	-0.19
Women 45-54	70.5	6.85	4.82	8.22	5.80	1.38	0.97	0.78
Men 55-64	67.2	5.42	3.64	4.98	3.35	-0.43	-0.29	0.49
Women 55-64	45.1	6.07	2.74	5.48	2.47	-0.59	-0.27	0.22
Men 65+	16.6	6.51	1.08	6.65	1.11	0.14	0.02	0.24
Women 65+	8.3	9.14	0.76	9.18	0.77	0.04	0.00	0.25
Total	66.45	100.00	66.45	100.00	66.70	0.00	0.25	--