Did you feel the shift?

Yesterday the UK’s Production Possibility Frontier shifted to the right – did you notice?

The potential supply of labour to the workforce increased, as ministers decided that a review of the default retirement age of 65 should be brought forward to next year rather than 2011.

Currently 1.3 million people work beyond the state retirement age, but apparently many more say that they would like to do so. For some this is because they don’t want to have to rely on the state pension as their only source of income from the age of 65, for others because they are quite capable of continuing to make a full contribution to the workforce, and choose to do so.

Age discrimination legislation is instrumental here - a number of age discrimination cases are waiting in the pipeline for the outcome of this and another challenge being brought against the government by the charity Help the Aged and Age Concern next week.

The CBI suggest that it may help people to plan for retirement if they have a date to aim for, as well as helping firms with workforce and succession planning if they can anticipate which roles will need to be filled and when.

For many people, the idea of early retirement is more compelling than carrying on working after the state retirement age – but in fact in most cases what those people are looking forward to is a chance to change what they do, from the full-time routine work of many years in the workforce to a new pattern which might include part-time, temporary or unpaid work which still contributes to the economy. This may contribute to the flexibility of the workforce which enables the economy to respond to fluctuations more easily.

On the other hand, many people over the age of 65 still have financial commitments to meet and no extra income to top up on the state pension, making them keen to keep working.

Many businesses are pleased to employ older people who have the experience which makes their Marginal Revenue Product of Labour positive for several years after the state retirement age – B&Q have had a policy of employing older store staff who give the inexperienced DIY consumer confidence that they can offer better advice and ideas than a teenager who does not look old enough to have put a paintbrush or screwdriver to good use.

But will they be depriving young people of the opportunity to get a job, particularly at a time when youth unemployment is high and predicted by the ILO to rise from 12% in 2008 to 15% in 2009?

So although the potential workforce may rise as a result of the government’s review of the default retirement age, shifting the POTENTIAL output of the UK economy to the right, you have to remember that we are unlikely to be using those resources of labour fully for the next few years; we have a big negative output gap and our ACTUAL output is likely to be some way below the Production Possibility Frontier.