Demography is destiny. This old saw for economists means that, try as we might to change our economic future, it is already determined by our population and its makeup.
The saying may overstate the case, yet for much of our nation’s history demographics have been a tailwind to our economy. Our population and workforce grew quickly and the typical American was young, energetic, and entrepreneurial.
Not so much today. Our working-age population has all but stopped growing, and the typical American is much older. Baby boomers — the largest age group — are in their late 50s and 60s and retiring — about 10,000 every day. Our demographics have turned into an economic headwind that will blow strong for a long time to come. To get back on course, we need to address our demographic destiny.
The most obvious way an older population weighs on the economy is that it means there are fewer potential workers. When the boomers were entering the workforce in the ‘70s, the working-age population grew by close to 2 percent each year. A dramatic increase in women entering the workforce during this time also fueled growth.
With boomers retiring and women now going to work as much as men, the workforce is hardly growing. This is unprecedented for the American economy. Throughout our history we could count on an ample supply of workers to power our growth.
So, you ask, what about those millennials, that large age group now in their 20s and 30s? But most of them are already in the workforce, and the opioid crisis and incarceration are hitting this age group hard, making it less likely that those affected will get to work anytime soon.
One struggle for an economy with an aging population is that older workers slow productivity growth. Productivity is a measure of how much we produce given how many people are working and the hours they work. It is the key to our standard of living. Strong and growing productivity means we are producing more with less effort. This is obviously a wonderful thing. Equally obvious is that slower productivity growth is not so good.
Productivity growth has throttled way back over the last decade. And it’s no coincidence this happened at the same time the leading edge of the boomers aged into their 60s. In my research with colleagues Adam Ozimek and Dante DeAntonio, we found something astonishing: As much as half of the productivity slowdown over the last decade is due to the aging workforce.
I had hoped we would find evidence of what we call the “wise man” theory. That is, when boomers retire, it hurt the businesses they leave as they take important idiosyncratic knowledge with them — things it would take years for younger workers to learn. The businesses are thus diminished when the boomers leave.
That was my hope because I’m a boomer. I was convinced that when I retire (not happening anytime soon), Moody’s would have a tough time adjusting (smiley face).
That’s not what we found. An old workforce that dings productivity is explained by what we call the “albatross” theory: Boomers are hanging on to their jobs, keeping younger colleagues from realizing their fully productive potential. Maybe the younger workers are more energetic and willing to take more risks. The boomers may be less willing to adopt new technologies, or their companies reluctant to invest in tools and training lest the boomers retire before the returns from those investments can be reaped.
The reality is that my younger colleagues at Moody’s will likely flourish when I finally leave, lifting productivity (very big smiley face).
If you buy what I’m saying, aging is a big problem for the U.S., but it threatens to be overwhelming for many other countries. The working-age population is already declining quickly in an increasing number of places, including China, Germany, Japan, and Russia.
But don’t despair. We can change our demographic destiny. We can do this by significantly increasing foreign immigration. Indeed, the reason we are in a better place demographically than much of the rest of the world is that we already allow significant numbers of immigrants into our country. Many other countries don’t, and probably never will.
President Donald Trump wants to restrict immigration in the U.S., but we need to do the opposite. We should allow many more immigrants. Highly skilled and educated immigrants for sure, but we will also need less skilled and educated immigrants. We must also turn undocumented immigrants into legal workers.
More immigrants mean more workers and stronger productivity growth. Immigrants are by definition risk-takers — only the most intrepid leave their home country for a strange new one — and are more likely to start businesses and innovate.
A fundamental pillar of American economic success has been our openness to the rest of world and their peoples. Remember that, and our destiny is bright.