Most people who report on economics have heard of productivity growth. Virtually all economists see it as the main determinant of living standards. However, NPR's Planet Money seems unfamiliar with the concept.

It had a piece on demographics and the problems of supporting retirees in the context of stagnant, or even declining, populations. Incredibly the piece did not even once mention productivity growth.

Economists would consider productivity central to this issue, since it would determine the ability of workers to support a growing population of non-workers. (The burden imposed by supporting a larger number of retirees is at least partly offset by a reduced burden from supporting children.)

Productivity growth is the reason that the country has enjoyed a large increase in per capita income over the last four decades, even as the ratio of workers to retirees fell from 5 to 1 to just 3 to 1. With productivity growth of 2 percent a year (roughly the average over the last 4 decades), the output of an average worker would rise by more than 80 percent over a 30 year period. (Many workers have not benefited from this rise in productivity because of the upward redistribution of income during this period, however this is an issue of distribution, not demographics.)

If an average retiree has 75 percent of the income of an average worker, and the ratio of workers to retirees were to fall from 3 to 1 to 2 to 1 over a 30-year period, it would be possible for both workers and retirees to enjoy a 65 percent increase in living standards. The impact of productivity growth swamps the impact of the change of the dependency ratio in this story, which is why economists focus much more on productivity growth.

It is also worth noting that population growth can have a negative impact on productivity growth. Slower growth in the labor force can raise the capital to output labor, thereby raising the rate of productivity growth. Slower population growth is also likely to lead to less strains on the physical and natural infrastructure which could lead to large gains in living standards that are not measured in GDP. For example, people will spend less time commuting in cities with less dense populations. People will also have more access to natural resources like beaches and national parks if the population were smaller.

Any serious story on demographics and a rising ratio of workers to retirees would discuss these issues.


Leave your comments

Post comment as a guest

  • No comments found

GuideStar Exchange Gold charity navigator LERA cfc IFPTE

contact us

1611 Connecticut Ave., NW
Suite 400
Washington, DC 20009
(202) 293-5380

let's talk about it

Follow us on Twitter Like us on Facebook Follow us on Tumbler Connect with us on Linkedin Watch us on YouTube Google+ feed rss feed