The Independent Market Observer

4/29/13 – Demography Is Destiny

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Apr 29, 2013 1:33:26 PM

and tagged Economics Lessons

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Over the past year, I’ve written about a number of issues that touch on demography, explicitly invoking it in discussions of employment and future growth. Like the group of blind men examining the elephant, however, I haven’t really considered the thing as a whole.

Demography, the study of the structure and characteristics of human populations, is almost unique in the economic universe in being something we can forecast with a great degree of certainty. We know, for example, how many people were born in 1965—that won’t change once the year is over—and we have a very good estimate of how many have died or had children since then. Unlike, say, employment, demography evolves over decades in a predictable way.

The best example of this is the baby boom. We know when they were born, we know when they turn 65, and we can make some pretty good predictions about how they will act in between.

Because of this, we need to take these predictable changes into account when examining economic trends. For example, one of the stats that has gotten a great deal of play recently is the declining employment participation rate; a smaller share of the population is now working, for reasons that are not generally understood. The financial crisis has been blamed for many discouraged workers abandoning employment altogether, and there is concern about the “missing workers.”

Looking at the data in the chart below, though, you’ll see that the participation rate has been declining since well before the financial crisis. It spiked in the late 1990s, when a strong economy drew people into the labor force, then declined through the early 2000s until stabilizing in the mid-2000s, when a strong economy again tempted people back in, before resuming its decline. You’ll also see a very high level of correlation between the decline in the participation rate and the growth (inverted in the chart) of the 65-plus population. Clearly, while the financial crisis didn’t help matters, a major factor driving the decline in the participation rate is the growth in the older population—a trend that’s been underway for almost the past 20 years.


Based on this chart, it seems to me that the participation rate won’t be climbing back to previous levels any time soon—which is to say, at all. Moreover, since we know that the 65-and-over group will be the fastest-growing demographic cohort for the next five-plus years, we can expect continual erosion in the participation rate and a slower-growing workforce.

This is important because it calls into question many of the assumptions used in analyzing the recovery so far. A very good article today in the Wall Street Journal notes that, due to this and other factors, many of the “missing” workers are not, in fact, missing. Rather than the illusions they’ve been described as, the recent declines in the unemployment rates may well reflect an actual decline in the workforce.

This also means that, in the future, we will need a slower rate of growth in jobs to reduce unemployment. Per one commonly quoted figure, we need to create about 150,000 jobs a month to absorb the new workers. The real figure will be less going forward.

In the short term, the decline in the available workforce as a percentage of the population will result in a faster decrease in unemployment. In the longer term, this will reduce future growth and change the way the financial markets act—again. I will touch on this tomorrow.

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