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Home Publications Blogs Beat the Press Planet Money Is Off the Planet on Demographics and Retirement

Planet Money Is Off the Planet on Demographics and Retirement

Thursday, 03 November 2011 04:26

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.


Comments (8)Add Comment
written by xteeth, November 03, 2011 8:56
Has not the productivity growth mainly been because fewer people are used to make products rather than an individual getting better at or more efficient at his job? And what happened to the numbers? I have read over and over that the productivity of Americans has about tripled since the seventies. This change in statistics I find confusing. I was, a few years ago common to say that the number of workers that the economy needs to add to stay even is 120,00 a month not the 60 to 90,000 now used.
The Wagon Can't Roll If There's No One to Push It
written by izzatzo, November 03, 2011 9:26
Slower growth in the labor force can raise the capital to output labor, thereby raising the rate of productivity growth.

Any economist understands the Wagon Paradox. If too many people are in the wagon the people pushing it can't make it roll.

If productivity increases are offset by more retirees in the wagon then the only solution is increase the number of people pushing it.

With population decreases there's even less incentive to push the wagon despite productivity increases since it's filling up with freeloaders.

Eventually the wagon stops rolling and even rolls backwards.

Get off the wagon and do your part to push or at least produce more children who can take your place as a pusher instead of a user.

Stupid liberals.
written by skeptonomist, November 03, 2011 10:18
Productivity is strongly correlated with capital investment, meaning use of labor-saving machinery. But more importantly, since the start of the industrial revolution productivity has been increased by the substitution of energy from fossil fuels for human and animal power and biofuels. It is not just "technology", it is exploitation of natural resources. Fossil fuels will not last forever. Growth of productivity means growth of energy use. Unless some substitutes are found for fossil fuels, even the current population of the earth will be unsupportable, even if we ignore the consequences of global warming.
Yes, exactly correct...
written by rationalrevolution, November 03, 2011 11:09
I'm written about this numerous times on my website, here is my most recent blog post on the subject: http://www.rationalrevolution....id=2133122

Clearly the problem with the American Social Security system is that the structure of the tax has basically failed to capture any productivity growth over the past 30 years, and it will continue to fail to capture productivity growth going forward unless changes are made to the funding structure.

Due to the fact that essentially all productivity growth over the past 30 years has gone to capital income and high end wages, virtually all of it has been untaxed by Social Security. This is one of the major concrete problems posed by growing income inequality in America.

Basically, if 30 years ago 1 worker produced 100 loaves of bread a day, today 1 worker produces 300 loaves of bread a day, so feeding a growing number of retirees should be easy, because today a worker produces more food than in the past.

The problem is that if 1 worker produced 100 loaves of bread a day 30 years ago, he was effectively paid 90 loaves of bread, out of which 11 were taken to feed retirees.

Today, a worker produces 300 loaves of bread, but that worker is still only paid 90 loaves of bread and is giving 11 loaves to taxes. The remaining 210 loaves of bread are going to executives and baker owners, and none of that additional 210 loves is taxed to pay for retirees, so even though we are producing more bread, its not being used to support retirees.

Then, what's happening is we are saying, oh look, we have too few workers being taxed, they can't support the retirees, we'll either have take more bread from the workers or give less bread to the retirees, never mind the fact that we have a huge and accruing stockpile of bread that's being totally untaxed!
written by coberly, November 03, 2011 11:16
actually it is you who are providing a classic example of human stupidity. you are incapable of thinking about the actual facts so you make a simple minded cartoon that looks to you like it fits one aspect of the facts.

then you proceed to "reason" as if the cartoon was the facts.
written by Jeff Z, November 03, 2011 1:45
@ xteeth: Productivity is typically measured on a per person basis, to take account of demographic changes.

The change in numbers comes about because of changes in birth rates, immigration rates, retirements, etc. Since these are not constant over time, the growth of the labor force is not constant over time. Thus the number of jobs that need to be created to keep up with changes in the growth of the labor force also changes. If the growth of the labor force slows for any reason, the number of jobs that needs to be created drops.

There is some element of bad luck here. Just when we really need a robust recovery, the amount of jobs that needs to be created slows down for the reasons I mentioned above. That can make it seem that the change in the number of jobs that needs to be created is politically manipulated to make the economy seem to be better than it actually is, because this benchmark has been lowered. I do not think that there is any political manipulation at work here, though. The economy is still in the tank as far as far as most people are concerned.
written by Jeff Z, November 03, 2011 1:48
The number of jobs that needs to be created to keep pace with changes in the labor force changes.

To restore prosperity, we still need job creation at a much faster pace than labor force growth.
Coberly, for heavens sake
written by reason, November 04, 2011 5:40
Izzat is satire! Often very good.

Rationalrevolution - one of the clearest written pieces I have seen, excellent - needs a wider audience. Maybe Angry Bear (coberly?) should publish it as a guest post.

Dean - maybe should you point out what the dependency ratio looked like in the 1950s and 60s with large families and non-working wives (plus lots incapitated by world war 2/ korean war / vietnam war)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.