Consider three news items from early March 2000.
German Chancellor Schroeder urges changes in his country’s restrictive immigration laws to allow in more high-tech professionals. The U.S. Congress acts to remove the earnings penalty for Social Security recipients. The Minnesota Legislature considers appropriating money to expedite immigration.
What’s going on here? Welcome to the wonderful world of demographic change! Population growth is slowing and labor markets are becoming tighter here and even in Europe.
Over the past 50 years, we have been bombarded with warnings of the potential dangers of rapid population growth. But politics over the next 50 years will be dominated by the practical realities of dealing with slower population growth and an aging population.
Tightening labor markets are the most visible manifestation of this change in the demographic environment. The U.S. labor has not only absorbed all of the post World War II baby boom but is well on its way to absorbing the baby boom “echo.” From here on out, natural population increase as a source of new labor will be a diminishing factor in furnishing new workers.
Immigration from other countries can of course increase, and it already has. Immigrants now make up highest proportion of the U.S. population since the wave of immigration that ended with World War I.
Few economists factor changes in population structure into their theories of how economies work. Richard Easterlin stands out as one who does. In his best known book, Birth and Fortune, Easterlin examines how different cohorts, groups of people born during a specific period, have affected by and have affected the U.S. economy.
Take the baby boom. Economists are well aware of its effects on consumption patterns.
But the baby boom also has acted as a proverbial pig in a python for the labor force. Using Easterlin’s analysis, one can see that this big cohort hitting the labor market in the late 1960s and early 1970s constituted a huge increase in the labor supply.
Without a corresponding increase in the capital stock, productivity and wages could be expected to stagnate. The nation coincidentally was pursuing bad fiscal and monetary policies that discouraged savings and investment.
The upshot? Nearly two decades of stagnation and a national sense of malaise, to use Jimmy Carter’s unwelcome but accurate description.
When the labor force had to absorb the baby boom population bulge, wages stagnated and productivity growth slowed. Now that the boom pig is getting closer to the exit end of the python, we can expect the opposite to happen.
Wages will rise, as labor becomes increasingly scarce, and firms will spend more on increasing productivity as a way of growing without hiring more scarce labor. More people will work, at least part time, through their 60s and perhaps well into their 70s. All this will be good for the economy.
But demographic change will go beyond this in its impacts on society as a whole. Nearly all the wealthy nations will see average ages continue to rise. Many European nations and Japan will see their total populations fall. The ratio of retired-to-working adults and of retired adults-to-children will change radically. The burden of Social Security and other pensions will rise relative to total output.
Our grandchildren will face conditions or challenges that we could not even imagine. But we are dealing with challenges that our own grandparents could not have predicted. Our grandchildren, like us, may have complaints about the society in which they live. But like us, few would choose to trade that society for the one earlier generations experienced.
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.