Question

How do "socio-demographic" factors affect levels of economic growth?

Answer 1

Demographic shifts may have many channels influencing GDP growth. Firstly, lower population growth explicitly means lower labor supply. Second, lower population growth has a potentially negative indirect effect on the supply of individual labor insofar as it leads to higher tax levels which reduce the incentive to work. Third, under the theory of the life cycle, lifelong consumption smoothing would mean that people transition from being net lenders in their youth to becoming net savers in their working years, and eventually dis-savers in their elderly years.

Hence, if the proportion of elderly people in the population increases, aggregate savings will decrease, resulting in lower investment growth and, in effect, lower GDP growth.

As these demographic trends played out, the U.S. average life expectancy has risen and the population has aged older. The average life expectancy at birth is now almost 80 years old, 30 years higher than it was in the U.S. population's median age is nearly 38 years old, almost 10 years older than it was in 1970. By 2050, with the U.N. Projects that the average age in the U.S. will be 42 years and that the age of 65 or older per cent of working-age men, between the ages of 15 and 64, would be more than double that in 1970.

The increasing age distribution of workers can have an effect not just on the growth and participation of the labor force but also on the longer-run natural unemployment rate. Older workers generally have lower unemployment rates than other age groups, and they prefer to move jobs less often. Young people also make up a smaller proportion of the labor force. The combination of high termination rates for older workers and lower numbers of younger workers would suggest a lower natural unemployment rate compared with the 1990s.

The expected decline in population growth and levels of labor force participation would have ramifications for long-term economic growth and demographic composition. The main determinants of the longer-run growth rate in the economy are growth in labor force and growth in structural productivity how efficiently the economy integrates its labor and capital inputs to produce production. Demographics indicate that growth in the labor force will be much slower than it has been in recent decades, and this will weigh on long-term economic growth.

In the end, how demographics impact economic results will also depend on how governments react, so let me explore the implications of demographic change for fiscal and other government policies in the remainder of my time.