Analysis of Labor Force Participation in Malaysia using Lee-Carter and Cairns-Blake-Dowd Stochastic Models

Suraya Fadilah Ramli, Noriszura Ismail, Zaidi Isa, Nurul Hanis Aminuddin Jafry, Ruzanna Ab. Razak

Abstract


This study investigates the labor force participation rates (LFPRs) in Malaysia, focusing on the dynamics of an aging workforce and its implications for retirement planning. With demographic shifts, including declining birth rates, increasing life expectancies, and an aging population, Malaysia faces significant challenges in sustaining its labor market and retirement systems. Using two stochastic mortality models, the Lee-Carter and Cairns-Blake-Dowd (CBD) models, this study provides detailed insights into the LFPR trends and the expected lengths of retirement (ELRs) by age and gender. A generalized linear modeling framework is utilized for the Lee-Carter and the CBD models, incorporating Poisson and Binomial regressions to estimate age- and time-specific LFPRs. The results indicate that the Lee-Carter model outperforms the CBD model in terms of goodness-of-fit metrics. The results reveal that the male LFPRs remain relatively stable over the forecast period (2017–2047), while the female LFPRs are projected to increase significantly from 41% to 78%. This marked growth in the female LFPRs reflects societal changes, including delayed retirement and greater workforce participation among women. The analysis also predicts longer retirement durations, with male and female ELRs showing substantial increases due to higher life expectancies and shifting labor force dynamics. The implications of these findings are profound, particularly for retirement planning and social security systems. The increasing ELRs underscore the urgency for policymakers to reform existing pension schemes and develop sustainable financial strategies to support the aging population. This study highlights the value of stochastic modeling in addressing the unpredictable nature of labor market transitions and retirement patterns.


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