4/29/13 – Demography Is Destiny

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

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

and tagged Economics Lessons

Leave a comment

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.

042913

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.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®