A Contracting Workforce Means Tepid Economic Growth for Advanced Economies

January 29, 2013

Over at the Fletcher Forum of World Affairs I have a brief article explaining how the aging of populations will not only place increasing burdens on governments providing entitlement benefits for the elderly, but will also strain economic growth.

But what is less discussed, and thus less well understood, is the effect of demographic transformation on economic growth itself. The problem is not strictly that the governments of these countries will be shouldering large obligations associated with a growing elderly population. It is also the fact that these countries will experience very low growth by historical standards because their workforces will be either stagnant or shrinking.

Total economic output can be expressed mathematically rather simply. Total GDP is the product of the number of workers in the formal economy and the amount produced per worker. It follows that yearly growth in GDP is a function of change in the size of the workforce and in productivity (i.e., the amount produced per worker).

For decades, Europe, the U.S., and other advanced economies have enjoyed strong growth because their workforces have been growing and capital investment and technology have allowed workers to produce more and more each year. That is now changing, however. Productivity is still improving, but workforces around the world are now barely growing and, in some countries, are about to shrink steadily for the foreseeable future.

You can read the rest of the post here.

posted by James C. Capretta | 11:37 am
Tags: aging demographics, economic forecasts
File As: Population/Demographics