How Population Changes Affect Economic Growth

June 22, 2015 0 Comments

The first Friday (usually) of every month, the Bureau of Labor Statistics releases their ‘Employment Situation’ report. In this report contains Table A-1: ‘Employment status of the civilian population by sex and age,’ and in this table, one can find the labor force participation rate for their respective months.

As on can see, the labor force hasn’t exactly been itself lately:

Note: Too Lazy To Make My Own Charts

Whether it is a bad or a not so bad thing depends on your politics, I suppose. Those critical of the growth in this economy would point out that the drop in the participation rates are a result of people dropping out of the labor force. Those supportive of the economy would point out the drop in the participation rates merely reflect the baby boomers that are retiring each and every month.

While both are partially true, neither explanation offer a balanced approach this phenomenon, and the relationship with the growth in our economy. Demographics can lead to productivity shifts in our economic expansion, but it can also lead to slower growth in our economy as well.

Above shows the relationship between economic growth and the civilian non-instituionalized population within the last 40 years (from 1975 – present). Population growth was pretty steady during the late 1970s and early 1980s, but given economic forces unique to their time, there was obviously no relationship between economic growth and population growth. As time moves on, there is a greater correlation between the two.

Between 1970 and 2007, the working age population growth averaged about 2.25%. Since 2007, that growth has dropped to 1%, with population growth projected to slow between 0.65% and 0.80%. Considering the high coloration between economic growth and population growth, we can also expect GDP to slow along with it.

The main problem with a shrinking labor force (or labor force participation) relates to its overall harm on potential economic growth. from a macroeconomic perspective, a greater number skilled employees increases the productivity of the labor force, which subsequently impacts a country’s standard of living measured in GDP per capita. This also increases potential for economic growth measured in aggregate demand (or GDP).

Weaker population/labor force growth also affects overall productivity output (which also effects GDP growth). In the long run, a nation’s real GDP growth rate depends crucially on the growth of output per hour, as discussed billions of times on this blog. While the very idea of productivity is being able to do more with less, less skilled employees working in our labor market translates to less output per hour, which means lower productivity growth.

There are good and bad reasons for a declining labor force; however, none of them exactly express the real impact it has on our overall economy.

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