A monumental demographic shift has occurred in the United States. For the first time in the nation’s history, the population growth of the 20 to 64 age group — the workforce age group — turned negative last year.
The graph below shows the decline starting toward the end of 2019. The Congressional Budget Office estimates that the potential labor force will grow at 0.4 percent per year, which is half the rate of 0.8 percent it rose a year from 2000 to 2020. This can have major implications for the country’s status as the predominant economic and military superpower.
Economic growth is a function of net additions to the labor force and productivity increases. Let no politician convince you otherwise. The former has slowed to a crawl, and the latter has disappointed, given the magnitude of technological innovation over the past 10 years.
First, let’s discuss population growth. The number of babies born per couple is 1.7 in the United States, far less than the 2.1 needed to keep the population the same. Immigration of working-age people can help curb the demographic crisis, but a significant percentage of the population (most of former President Donald Trump’s followers) disapprove because they fear that immigrants will destroy the American way of life. President Joe Biden wants to increase immigration back to one million per year, but if a Republican president is elected in 2024, expect the number to be cut in half again.
So, are other options available, absent increases in immigration? One would be to increase the labor force participation rate, which is the sum of all workers who are employed or actively seeking employment divided by the total civilian working-age population. The graph shows it at 61.4 percent, much lower than the 67 percent peak in 2000. That amounts to 38.6 percent (100 minus 61.4) of the working age population as the “unused capacity” of labor in the country.
So, incentives should be offered to get some of these citizens into the work force. One would be to offer subsidized child-care to mothers — which Biden has proposed — who complain that they cannot afford to pay for child-care relative to the salaries they could earn, if they worked. The objective would be to double the labor force grow rate back to the rate it rose — 0.8 percent annually — from 2000 to 2020.
Well, why is population decline detrimental? Because economic growth will slow to a crawl. Smaller cities and towns could lose their tax base because of the decline, forcing them and many businesses into bankruptcy. The (some estimate overvalued) dollar could lose its status as the preeminent currency of exchange, leading to a decline in its value and thus our standard of living. Paying off the national debt will be more difficult with a slower growing economy.
Remember the perception in the 1980s that Japan was going to take over the world. What happened? Japan experienced a declining population that put the economy in a long-term funk with deflation slowing down spending. Its annual real GDP growth has been around 1 percent between the early 1990s through 2019.
If China can continue on its current growth trajectory, America will be playing second fiddle in the international arena. China too will soon see a population decline, but it has four times the U.S. population, which means that if it can come close to matching our productivity, its GDP will be substantially larger.
China will have more clout than America in international affairs and a possibly a more potent military. Just recently, The Economist reported that the Taliban is busy courting China to fill the developmental vacuum that America is leaving behind in Afghanistan.
Let’s discuss the growth rate of productivity. Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons. The slope of the line graph measures productivity gains over time. Note that the slope of the line has not gotten steeper over the past 10 years relative to the prior 30 years, indicating that robotics and Artificial Intelligence, as of yet, have not turbocharged labor productivity as was forecast.
In fact, the productivity malaise is hurting most advanced economies.
Why? Because businesses might not adopt newer technologies immediately because of an aversion to change or they might wait until their existing machinery and equipment wears out before they invest in the latest devices.
Researchers from the University of Chicago and MIT have found that productivity enhancements follow what they call the “productivity J-curve.” As new technologies are first adopted, firms focus on developing new business processes. That shift initially hampers productivity, but once fully incorporated, the enhancements lead to productivity surges.
The pandemic is spurring productivity increases. A survey of firms conducted by the World Economic Forum found that about 80 percent of employers intend to accelerate plans to computerize their processes and provide more opportunities for remote work, and 50 percent plan to accelerate automation of production tasks. About 43 percent expect changes like these to generate a net reduction in their workforces, which by definition implies improvements in productivity.
So, absent increases in the working age population, focus on three metrics to estimate future growth: immigration policy, labor force participation rate and productivity increases. The Biden administration, to its credit, is being honest about the future. Post-2022, they estimate that real GDP will grow at an annual 2 percent rate.
If current trends continue, the current 0.4 percent growth in the labor force plus a 0.7 percent growth in productivity adds up to 1.1 percent long-term growth in real GDP. Productivity increases will have to exceed one percent and the net addition to the work force will have to double to 0.8 percent to meet the two percent forecast.
If you buy into conservative claims that their policies can grow the economy between 4 to 6 percent per year — as Trump had asserted — by cutting taxes and regulations, I will be more than happy to sell you the Sunshine Skyway Bridge, which I own, lock, stock and barrel.
Murad Antia teaches finance at the Muma College of Business, University of South Florida, Tampa.