The overall economy of the United States — as measured by the gross domestic product — grew at a rate of 2.4 percent year over year in 2014.
This marks the ninth straight year that the economy grew less than 3 percent, which has been considered the estimated benchmark trend for U.S. growth since World War II.
In response to the disappointing post-crisis recovery, many commentators have failed to acknowledge the impact of demographic trends on labor supply and broader economic activity.
One could imagine, and rightly so, that numerous macroeconomic indicators may be influenced by trends in demographics such as working-age population or the proportion of relatively young or old.
Various cohorts display different economic behavior in terms of savings and spending patterns, productivity levels, hours worked and so on.
For example, take the labor force participation rate, which measures the proportion of the population that is either working or actively searching for work in the past four weeks.
This proxy for labor supply reached a high of 67.3 percent in early 2000, plateaued to around 66 percent from 2005-08 and has fallen to its current level of 62.7 percent since the onset of the Great Recession in 2007.
Generally speaking, a higher participation rate implies a larger labor force whose physical and human capital attributes can be allocated toward a higher rate of productivity.
If the observed decline in the labor force participation rate really is indicative of a struggling economy, then it should have shown signs of upward pressure (or at least a leveling off in a similar fashion to the 2004-07 period) over the last several years when job growth has rivaled that of the historical year of 1999.
The fact is, more than 12 million jobs have been added to the private sector since 2010. More than three million jobs were added in 2014. Alas, the participation rate has not reversed its downward trajectory, signaling that other factors are at play.
So what do demographic trends have to do with this fact?
First, the U.S. is aging. The median age as of 2010 was 37.2 years, continuing a pattern of increasing at a decreasing rate since 1970. The median age is expected to level off to around 40 by 2030. The proportion of individuals 65 and older is expected to increase from 13 percent currently to roughly 20 percent by 2050.
Second, the U.S. population has experienced historically low — but still positive — growth rates in individuals 18-64. Growth rates in this prime working age cohort averaged 1.4 percent annually from 1956-2007. Since then, the rate has averaged 0.5 percent annually. The only time this measure has been less than 0.7 was in 1962. This trend is expected to continue.
The U.S. Census Bureau reports that while “the working-age population is expected to increase by 42 million between 2012 and 2060 … its share of the total population declines from 62.7 percent to 56.9 percent.”
A lot of innovation and productivity stems from young and working-age adults. Thus, its level growth is promising though its population share decline may present a challenge to future productivity.
The U.S. is in a relatively positive economic position compared to the rest of the advanced world. While much of the 34 countries representing the industrialized world are expecting declines in young and working-age cohorts, the U.S. demographic patterns suggest a hopeful contrary.
Ignoring the dramatic change that the U.S. is projected to undergo demographically will render a lot of discussion of the macroeconomy incomplete. Instead, policy makers should consider new opportunities that may arise from an older, but innovative, plurality nation on the horizon.
Nicholas Mangee is an assistant professor of economics at Armstrong State University and can be reached at Nicholas.mangee@armstrong.edu.