Arnott: Mind The (Expectations) Gap

July 03, 2013

 

Economic Growth
As interesting as studying historical and prospective demography might be, such an analysis would be incomplete if we did not consider the future prosperity of different countries in view of their past, current, and future demographic profiles. For this reason, we combine the rich trove of past and forecasted future data from the United Nations with our previous work establishing a link between demographic profiles and economic growth. Figure 2, drawn from Arnott and Chaves (2012), shows the relationship between the size of each age group and growth in Real Per Capita GDP.

Table 2
For a larger view, please click on the image above.

 

Our results show that children have a slightly negative effect on economic growth, but young adults start to positively contribute as they join the workforce. Skeptics might argue that wages and productivity peak later in life, typically in one's 40s and 50s. This is generally true, and helps to explain why the most prosperous nations often have a larger proportion of mature adults than the less prosperous nations. However, the definition of a peak, whether for productivity or anything else, is that we stop rising and start falling! When we reach peak productivity, by definition our productivity growth is zero.

The average contribution to GDP growth becomes negative between 55 and 60. This does not mean that people begin to consume more GDP than they produce after age 55, only that—on average—workers above age 55 have passed their peak in productivity. Intuitively, the average 60-year-old is more productive than the average 40-year-old, but not so relative to the average 55-year-old. At ages 60 and above, the coefficients decline much more sharply: the mature worker exhibits falling productivity, and in retiring, a worker's productivity simply falls off a cliff.

 

 

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