Productivity growth has been in a funk for the past 20 years in the US, but we are far from the only ones with this problem. Reasons for this collapse in growth are many, but today I’d like to put the magnifying glass on population (follow the links for previous discussions on corporate bailouts or executive pay). Economic activity has just two inputs: people and capital. In fact, we can probably reduce that even further. Economic activity is output per person multiplied by the number of people. There are, of course, ways to raise and lower the per-person output. The simplest solution, however, is just growing the (working-age) population.
The working-age part is becoming increasingly important. To demonstrate, let’s look at a couple charts. Productivity growth, we can see, is stagnating.
This is remarkably strongly correlated to working-age population.
Young people are simply not entering the workforce as quickly as older people are reaching retirement age. See below. First up is the portion of the population age 65 and older followed by a demographic pyramid (the problem: not a pyramid).
So, what’s going on? Productivity has plummeted while the population aged. A growing consensus of economists have come to the conclusion that population age and productivity are closely linked. A recent paper found that an increase of 10% in the population of people over the age of 60 was associated with a 5.5% drop in economic growth.
People that retire from the workforce take their skills with them; if a population gets older, more will retire and it will be a little bit like a reduction in the total population. We also live in a society that wants retirees to have happy lives, so many of them draw on pensions. That creates another burden on the remaining workers. Some of their productivity is going towards people that will not ever hold another job (I’m not trying to rag on retirees; they already made their contributions to society). We not only have fewer people in their prime working years, but those that remain are increasingly burdened.
The good news is that this is a predictable, slow-moving problem. We will not be suddenly invaded by octagenarians while Gen Zers flee to Ibiza. There are also a couple of solutions that build on each other. There are two ways that you can get a bigger population.
The first is through higher birth rates. Raising those is easier said than done, but making it more affordable is a good first step. We have benefits that help the very poor with the costs of having a child, but middle-class people have been left in the dust. We can see from this chart that education is negatively correlated with birth rates…until it isn’t. Making subsidies more universal could be considered an investment in population growth.
The quicker fix is to encourage the immigration of working-age people. It would not be hard to do; people of all educational levels want to move here. Immigrants also have a higher birth rate than native-born women by about 20%. Targeting highly educated people with a path to citizenship if they move here could help us patch the holes in our ship without the political fallout that comes from larger numbers of unskilled workers (to be clear, even unskilled workers have a positive effect on jobs for natives).
This is a long-term problem and long-term problems require long-term solutions. Implementing a kind of social security for children (similar to what Sen. Mitt Romney (R – UT) recently proposed) would take decades to show its full benefits. Immigration is faster, but even that takes time. Germany’s sudden influx of refugees took a couple years to sort itself out. The only way to solve a problem is to face it, though. We cannot solve our demographic issues by ignoring them.