The Guardian Unlimited, February 26, 2013
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The retirement of the baby boom cohorts means that the country’s labor force is likely to be growing far more slowly in the decades ahead than it had in prior decades. The United States is not alone in facing this situation. The rate of growth of the workforce has slowed or even turned negative in almost every wealthy country. Japan leads the way with a workforce that has been shrinking in size for more than a decade.
Slower population growth is affecting the developing world as well. Latin America and much of Asia are seeing much slower population growth than in prior decades. In China, the one-child policy adopted in the late 1970s has virtually ended the growth in its labor force.
According to many media pundits, this picture of stagnant or declining labor forces is cause for panic. After all, it means that countries will be seeing an increase in the ratio of retirees to workers. Countries around the world will be suffering from labor shortages. And, with even developing countries experiencing slower population growth, there will be nowhere to turn to make up the shortfall.
The only part of this picture that should be scary is the failure of people involved in economic policy debates to have even a basic understanding of economics and arithmetic. There is no reason that the prospect of a stagnant or declining workforce should concern the vast majority of people. In fact from the standpoint of addressing global warming and other environmental problems this is great news.
First a bit of arithmetic would be useful. People involved in economic policymaking tend to have problems with arithmetic, which is why they failed to recognize the housing and stock bubbles. Anyhow, some simple arithmetic can quickly show that the concerns about falling ratios of workers to retirees are ill-founded. In the United States the Social Security trustees project that the ratio of workers to retirees will fall from 2.8 in 2013 to 2.0 in 2035.
It’s pretty simple to figure out the impact of this decline. Let’s assume that an average retiree consumes 85 percent as much as average worker. This means that our 2.8 workers must produce enough goods and services to support the equivalent of 3.65 workers. That would imply each worker gets to keep 76.7 percent (2.8/3.65) of what they produce with the rest taken away through taxes or other mechanisms to support pesky retirees.
When the ratio of workers to retirees falls to 2.0 then each worker will get to keep 70.2 percent (2.0/2.85) of what they produce. This implies a drop in the share of output going to workers of 8 percent over the next 22 years.
While that would depress living standards, we also will be seeing an increase in potential living standards from rising productivity growth. If productivity grows at the rate of 1.5 percent annually, roughly the rate it has been growing over the last two decades, then productivity in 2035 will be almost 40 percent higher than it is today. This means that the fall in the ratio of workers to retirees will take back less than a quarter of the potential gains from productivity growth. (It’s true that most workers have seen little benefit from productivity growth over the last three decades, but this points again to the importance of intra-generational distribution and not being distracted by demographic nonsense.)
And this story puts the situation in the worst possible light. After 2035 productivity will continue to grow, but the ratio of workers to retirees will be little changed for the rest of the century. Why exactly are we supposed to be scared?
The story is even more ridiculous for China where productivity per worker has been increasing by more than 5 percent annually. This translates into an increase in output per worker of more than 160 percent over two decades. We expect workers in China to be terrified if 10-15 percent of these gains are pulled away to support a larger population of retirees?
Of course there is a story of labor shortages in this picture in the sense that it will be difficult to find workers for the lowest paying and least productive jobs. With a stagnant or declining labor force workers will have their choice of jobs. It is unlikely that they will want to work as custodians or dishwashers for $7.25 an hour. They will either take jobs that offer higher pay or these jobs will have to substantially increase their pay in order to compete.
This means that the people who hire low-paid workers to clean their houses, serve their meals, or tend their lawns and gardens will likely have to pay higher wages. That prospect may sound like a disaster scenario for this small group of affluent people, but it sounds like great news for the tens of millions of people who hold these sorts of jobs. It should mean rapidly rising living standards for those who have been left behind over the last three decades.
And that is the basic story of fears over stagnant or declining populations. The people who hire help, who also dominate economic policy debates, are terrified over the prospect that they will have to pay workers more in the future. The rest of us can sit back and enjoy watching them sweat as ordinary workers may finally start to see their share of the gains of the economic growth of the last three decades.