productivity that occurred in the recession of the late 1980s and early 1990s. figure 4 contributions to changes in gdp per capita percent contribution to annual change note : the chart was derived using 3 year averages of gdp per capita, hours worked, and population in order to show the underlying trends in labour utilisation and labour productivity. the importance of labour productivity growth to the long run economic outlook becomes very clear when we look at demographic trends. figure 5 shows labour force projections which are based on three population projections. all three projections assume medium fertility and medium mortality but each has a different assumption regarding migration. with zero net migration the size of the labour force begins to decline from 2018. higher levels of migration push the track up, but even with an annual net gain of 10, 000 from migration, the growth in the labour force slows, and the labour force eventually levels off. net gains from permanent and long term migration have averaged 13, 600 per annum over the last decade, compared with - 4, 700 per annum in the previous decade. figure 5 projected labour force people in the in labour force, millions these projections reflect the ageing of the population. birthrates underwent a long term decline from the 1890s through to the 1970s, although the post war baby boom provided a temporary interruption. around 2010, the number of people leaving the labour force - mainly baby boomers - is projected to rise sharply. even if these people were to put off retirement for a while, growth in labour utilisation is still likely to slow. any substantial growth in the labour force would have to come via high levels of migration. taking one of our labour force projections - the one based on annual net migration of 10, 000 - we can derive scenarios for future gdp per capita based on assumptions about labour productivity. let ’ s assume that labour productivity grows at 1. 5 % per annum, which as we have seen, is similar to the present growth rate. for each year of the projection we add this growth to the projected growth in the labour force to get gdp growth. ( in doing this, we are assuming that number employed will grow at the same rate as the labour force. that is, we are assuming that the unemployment rate will stay constant over the projection period. ) for each year of the projection, we can then calculate gdp per capita, using the projected population figure. the result is shown in figure 6, along with projections using alternative labour productivity assumptions. the lowest scenario assumes no growth in labour productivity, and

inhibit inflation. 5. the decade ahead we can use our analysis to give us an indication of what growth in gdp and gdp per capita could be in the coming decade. this is not a forecast, but rather an illustration of two scenarios. table 2 sets out two scenarios for the 2004 - 2014 period. we have seen these two scenarios before, in figure 6. the first scenario assumes that labour productivity will grow at 1. 5 % per annum, which is similar to the growth rate that we have had over the past 5 years. the second scenario assumes that labour productivity will grow at 2. 0 % per annum. given that both scenarios are based on the same demographic projections, the changes in population and labour utilisation are the same for each scenario. as table 2 shows, the projected increase in labour utilisation over the next decade is much lower than the increase that we saw over the last decade. this reflects the participation rates in the official labour force projections that we have used, as well as our assumption that the unemployment rate remains constant. these projected increases in labour utilisation are indicative only. nevertheless these low increases gel with what we know. with participation rates already very high, future rises are unlikely to be as large as they were over the last decade. furthermore, from around 2010 many baby boomers will be retiring, putting downward pressure on the overall participation rate. also, given that the unemployment rate is already low, we definitely won ’ t see the same falls in unemployment that occurred over the last 10 years. table 2 contributions to growth in gdp per capita average annual percent changes 1984 - 1994 1994 - 2004 2004 - 2014 scenario 1 2004 - 2014 scenario 2 labour utilisation 0. 0 1. 0 0. 3 0. 3 labour productivity 0. 7 1. 2 1. 5 2. 0 gdp per capita 0. 7 2. 2 1. 8 2. 3 population 0. 8 1. 2 1. 0 1. 0 gdp 1. 5 3. 4 2. 8 3. 3 our projections suggest that if we want to see gdp per capita grow at the same rate over the next decade as it did in the previous 10 years, we will need to lift our labour productivity. if labour utilisation was to grow by 0. 3 % per annum - which doesn ’ t seem to be unrealistic - then we would need to lift our productivity growth from its current rate of around 1. 5 % per annum to nearly 2 % per