Research Affiliates: 1% ... The New Normal Growth Rate?

November 16, 2012

 

When baby boomers began to work in the 1970s, the proportion of the population over age 55 was less than 18%. Over the past decade, during which the leading edge of the boomers reached age 55, the proportion of the population aged over 55 has risen to 25% (see Figure 3). That may not sound like a big change, but it’s a 19% jump in just half a generation. Those of us over age 55 will rise to 31% of the population by 2030, a 48% jump in 30 years, and will continue to grow thereafter.1

 

To state the obvious, we can’t see a large jump in the share of the population over 55, without a corresponding drop in the roster under 55. The average employment rate for people aged 25–54 from 1990 through 2010 was 82%; in sharp contrast, the average employment rate for people over age 55 was only 29%. A fast rising proportion of the population in an age group with a low employment rate will lower the total employment rate. While boomers may have to remain employed at rates higher than today’s oldsters, many will choose to retire and others will no longer be able to work.

The rise in the employment rate from 56% in 1950 to 64% in 2000 boosted GDP growth by 0.3% per year relative to a constant employment rate. From 2000 through 2010, the employment rate declined to 58%, enough to shave 1% per year off of GDP, relative to a constant employment rate. Matters have not improved since 2010. While the recession accelerated this decline, demography will continue to exert downward pressure on the U.S. employment rate. A simple calculation, assuming constant employment rates by demographic sub-group, suggests a 0.2% per year continued demographic reduction in GDP growth over the next two decades as boomers move into their retirement years.

The best data for assembling these forecasts comes from the U.S. Census Bureau and the Bureau of Labor Statistics. The Census Bureau provides future population growth rate estimates. Near-term, these are highly reliable. Next year’s 65-year-olds are alive today, age 64; we can count them. The census forecasts do not become blurry, as to the scale of the working age population, until well past 2030. Only the very distant forecasts should be viewed as speculative.

The future path for the total U.S. employment rate can then be calculated with some precision using the detailed demographic data readily available from the Bureau of Labor Statistics (though surprisingly few bother to do so). Any careful examination of the data will confirm our conclusions regarding a slowing rate of population growth and a declining trend in the total employment rate.

Productivity
The third component of GDP growth, productivity, is more difficult to predict. 

Here again demography provides some strong clues. Arnott and Chaves (2012) explain that “For each of us, the biggest jump in our contribution to GDP occurs as we transition from nonworking adolescents into gainfully employed 20-somethings. Another, often smaller, jump in our contribution to GDP occurs as we mature into our 30s. By our 40s, the evidence of real wages would suggest that most of us are at or approaching our peak contribution to GDP, with a falling contribution to GDP in our 50s and 60s.” It’s not that mature adults are unproductive; rather, once we reach peak productivity (outside of unskilled labor, this appears to happen in our 40s and 50s), our productivity crests; our contribution to GDP growth turns negative. The aging of the baby boom generation over the next two decades will depress the U.S. employment rate, and the aging of the labor force will slow our productivity growth.

 

 

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