United States Demographics, Immigration and Economic Growth



 


AGING POPULATION, LABOR FORCE AND ECONOMIC GROWTH


The U.S. birth rate is not only below replacement but it is the lowest since records began in 1909. The United States’ population is expected to increase about 10% (30 million people) over the next 10 years; this assumes the recent levels of immigration that are higher than the reduced levels announced by President Trump.


Some statistics on the aging of the U.S. population:

  1.   .    According to the Census Bureau, by 2030, the number of Americans age 65 and older will have increased by 20 million.
  2.    .    At that point, one in five Americans will be 65 or older, which is up from less than one in 10 in 1960.
  3.    .    By 2060, the Population Reference Bureau expects the number of Americans 65 and older to more than double from 46 million today to over 98 million.
  4.    .    In less than two decades, older adults are set to outnumber kids (under 18) for the first time in US history.
  5.      All of the population increase in 10 or 20 years will be in the over-65 group;                                    the number of people under 65 will stagnate or decline.

The flip side is that the number of children under the age of 18 will show little growth. One government projection has the number of children only increasing by 6% over the next 30 years. As a percent of the population, children made up 34% in 1970 and now make up about 22%. The percent will fall slightly in the future; the rate of decline will be low only because of a slowing in the rate of increase in the total population.

 

The labor crunch is likely to persist for some time. The Pew Research Center projects very little growth in the working-age population over the next two decades. If the United States were to cut off the flow of new immigrants, Pew noted, the American working-age population would shrink to 166 million in 2035 from 173 million in 2015.

 

The United States has a special problem. Because of the opioid epidemic and suicide, America’s adult mortality rate is increasing, mostly among white men under the age of 55. A 15-year-old boy’s probability of dying before the age of 50 (pre-pandemic) is now higher in America than in Bangladesh.

 

Most of the increase in the size of the labor force has been in the over-55 age group because this is the fastest growing age group and more Americans are working past retirement age. There has been little increase in total employment in the under-55 age group. There are studies that suggest an aging labor force causes slower productivity growth.

 

The American economy had been growing at about 2% percent a year before the pandemic. Employment was growing at about 1.0% a year; productivity (output per employee) was also growing at about one percent a year. The size of the labor force (employed plus unemployed) is expected to grow at about 0.5% per year after recovery from the recession. The growth rate is in long-term decline. In the near future, most or all economic growth will be due to increases in productivity.

 

The demand for labor has growing faster than the supply; this is the main reason for the falling unemployment rate before the pandemic. Also, real wages (after inflation) started rising. This trend should continue. But rising real wages and labor shortages might lead to accelerated automation such as robots and automated business information systems, limiting the rise in real wages. 

 

DEMOGRAPHICS AND GEOGRAPHY

 

Demographics is connected to economic geography. Just 31 counties, one percent of the counties in America, account for nearly one-third of total GDP.  All included or were near major U.S cities. Two cities and one region – New York City, Los Angeles and San Francisco/Silicon Valley – alone account for about 15% of total GDP. 

 

These 31 counties also account for about one-fourth of total employment. So output/employee in these counties was higher than the national average. These counties produced $1.3 trillion more output than they would have produced if their workers had average productivity. Network effects and concentration of high output/worker industries, especially technology, are two of the reasons. 

 

The information sector is particularly concentrated geographically, with nearly 75% of its output located in just a few dozen counties.

 

DEMOGRAPHICS AND IMMIGRATION

 

Immigration has been crucial to the growth of the labor force for years. Over the last two decades, immigrants and their children accounted for more than half the growth of the population of 25- to 64-year-olds, according to the Pew’s analysis. Over the next 20 years, immigrants and their children will have to make up for the net deficit in the labor force caused by below-replacement birth rates and the retirement of the baby boom generation. If immigration were to continue at recent levels before Trump, around 2050 the United States would have the lowest percent of retirement-age population of any developed country. Even lower than China.

 

Immigration over the last 50 years has impacted American demographics. The American population continues to grow despite below replacement birthrates of native-born inhabitants. Immigrants tend to be young, increasing the size of the workforce. The education and skills they bring is a “free lunch” for the American economy. A high percent of "Americans" who have won Nobel prizes were immigrants or the children of immigrants.

 

Immigrants and their children have traditionally provided a disproportionate share of entrepreneurs. “Immigrants start companies at twice the rate of native Americans. Almost half the companies in the Fortune 500 were started by immigrants or their children.” (Austan Goolsbee, “Sharp Cuts in Immigration Threaten U.S. Economy,” New York Times Sunday Business, October 13, 2019, 4). One of the founders of both Google and Intel were immigrants; the current CEOs of Microsoft and Google are from India. 

 

The Trump administration shut off most legal immigration and made it difficult for foreign, especially Chinese, students to attend American colleges. In the past, foreign students who remained in the United States were a major source of scientists, technology workers and entrepreneurs. Over half of the science, math and engineering graduate students in the U.S. are from foreign countries.

 

Like other wealthy countries, economic growth will depend on productivity increases. Productivity growth in the ten years of this economic expansion (since 2009) was the lowest for any ten-year period since the end of World War II. It is possible, however, that government statistics are not picking up the productivity increases from innovations in information technology.

 

Limiting or discouraging immigration, foreign work visas and foreign graduate students will reduce major sources of American innovation and productivity growth in the future.


IMPLICATIONS


A few implications of these statistics and population projections:

More senior citizens and fewer children imply that consumption among seniors will replace investment in children (education). By itself, this might lower economic growth rates. This may be countered, however, by a large increase in investment in health care.

As more Americans go from high income years to retirement, they also go from saving to dissaving. Seniors will begin to sell off financial and other assets. Large-scale stock selling indicates that stock prices will not perform as well in the future as in the past. Other things equal, the cost of capital – interest rates – should go up. Government trust funds for Medicare and Social Security will be used up; governments will be forced by older voters to substitute general tax revenue. Combined with structural deficits and rising interest expense on the national debt, less money will be available for other government programs. 

More pressure will be put on fiscal and monetary policy to counter the tendency towards low economic growth or recessions due to an aging population. 

CONCLUSION

With labor force growth rates falling and productivity not increasing, the labor force aging, and immigration restricted, long-term U.S. economic growth rates will be lower in the future – below 2% - than in the 2000-2019 period. Productivity might increase with the widespread application of robotics, business software and artificial intelligence.


Faced with a much different demographic than the "baby boomer" and population growth of most of the post-World War II period, American attitudes and policies toward immigration, retirement, Social Security and Medicare, and allocation of government funds might be different in the future than they are now.

=============================================================
For background on global demographics and a deeper look at the relationship between demographics and economic growth, see the post on Global Demographics and Economic Growth.

Comments

Post a Comment

Most Popular Posts

Adam Smith's Pin Factory

Image
ADAM SMITH VISITS A PIN FACTORY   Adam Smith’s description of a pin factory is on the first page of  The Wealth of Nations .  (Chapter 1 – “Of the Division of Labour”)  Drawings of pin factories of this period show workers using hand tools. Smith says the process can be broken down into 18 distinct steps, including packaging the pins. Smith mentions that pin factory workers were poorly paid, despite their high productivity.    Adam Smith says he visited a pin factory employing 10 men who produced 48,000 pins per day.  If each of the ten workers had done all the steps themselves, Smith says each worker could produce only 10 or 20 pins per day.  So the pin factory replaces 2,400 to 4,800 pin makers. The increase in labor productivity (output per person per day) is as high as 50 times that of individual pin makers.     This reduction in unit cost or average cost (AC) and the huge increase in quantity produced do not just replace older methods of organization and production.  They increa
Read more

The Structure of the Economy: Bilateral Oligopoly

Image
DEFINITION OF A BILATERAL OLIGOPOLY Models of market structure assume that the demand side is represented by a large number of buyers.  The structure of the market, and the assumed market outcomes, depends on the number of suppliers and how they compete.  Suppliers either post one price or exploit their knowledge of buyer categories by using price discrimination.  Despite the comments about the key role of consumers in determining economic performance, consumers are fairly passive when the discussion focuses on imperfectly-competitive industries.  But many markets are not structured this way; the buyers are not passive consumers but large corporations that do not passively accept suppliers’ prices.  Net prices are actively negotiated.  These markets are often bilateral oligopolies. In a bilateral oligopoly the buyers are not an undifferentiated mass of consumers but rather a small number of purchasing agents or professional buyers representing large purchasers.   T
Read more

The Stock Market Crash of 1929 and the Beginning of the Great Depression

Image
Famous Headline Introduction The usual reasons given for the Great Depression – the stock market crash of 1929 and the later collapse of the banking system – do not tell the whole story. Available economic data indicate (there were no national income accounts in 1929) that a recession had already begun before the stock market crash. The crash of October and November of 1929 was a catalyst that made the recession worse but the partial stock market recovery in early 1930 did not end the recession. Industrial production continued to fall quickly and unemployment rose rapidly in 1930. Continuing farm and businesses failures over the next two years wiped out thousands of small rural banks and threatened total financial collapse in early1933.  For a fuller explanation, we have to go back to the 1920s to see additional reasons for the origins and the rapid decline in output at the beginning of the Great Depression. We have to look at the internationa
Read more

Guide to Pages and Posts

PAGES - ECONOMICS TUTORIALS This set of economic essays in Pages are equivalent to a course in economics. They emphasize the dynamics of economic growth and development, and the role of information in the functioning of modern markets. BASIC CONCEPTS AND THEORY Chapter 1 - Introduction and Summary The Beginning of the Industrial Revolution   in England       Chapter 3 - Economic Development and Economic Growth Chapter 4  - Production Functions and  Supply Chains Chapter 5 - Demand, Income and Consumption Chapter 6 - Competition, Strategies and Structure Chapter 7 - Imperfect Competition: How Large Corporations Compete Chapter 8  - Case Study:  Parker Hannifin Chapter 9  - Bilateral Oligopoly Chapter 10 - Examples of Bilateral Oligopoly Chapter 11  - Critique of Basic Economic Theory MARKET DYNAMICS AND INFORMATION:  HOW MARKETS WORK Chapter 12  - Introduction to Information and Economic Structure Chapter 13  - How Markets Work:  Transaction Costs and Market-Makers Chapte
Read more

Explaining Derivatives - An Analogy

Image
You go around to farmers with cows. You buy all the cows and pay the farmers a small fee to milk the cows and sell the milk. You pay for the cows with ass(et)-backed securities called MBSs (Milked Bovine Securities) that you tell investors are udderly safe. But some of the cows don't give enough milk (cow flow problem) or give no milk at all. You take some of the asset-backed securities, say they're backed by the subprime cows, and use them as collateral to sell another set of securities called CMOs (Cow Milk Obligations). Then you buy CDSs (Cow Dried-up Swaps) from AIG (Angus Insurance Company) to insure the CMOs when the cows stopped giving milk. If you work it right, you collect more on the CDSs than you pay out to retire the CMOs. The money you get from selling the dead cows go to pay the CLOs (cow leather obligations). You could also sell CDOs (cow dung obligations) that depend on how much cow dung is produced. This is a typical Wall Street product - turning sh
Read more

Government Finance 101: Welcome to Alice in Wonderland

Image
    Fiscal Policy   Some basic definitions:   Deficit.    The difference between the federal government’s spending and its revenue in one fiscal year.   The fiscal year starts on October 1.  So fiscal year 2024 started on October 1, 2023. You know right away this is going to be confusing. Yearly deficits before the coronavirus were around $1 trillion per year. For fiscal year 2021, the deficit was $2.8 trillion. Total stimulus spending and tax cuts were around $4 trillion. The Congressional Budget Office’s latest projection is an average yearly deficit of $1.5 trillion for the next 10 years. This should be viewed as a minimum.   Social Security and Medicare are funded by their own taxes and working down their trust funds (selling government bonds). Subtracting Social Security and Medicare taxes from the Federal budget, other revenue covers about 50-60% of all other government spending; the other 40-50% is the deficit and financed by borrowing.   Debt .  Short for national debt.
Read more

John von Neumann Sees the Future

Image
John von Neumann JOHN VON NEUMANN CREATES THE FUTURE If you want to understand the world we live in, you have to know about the thinking of three men – Alan Turing, Claude Shannon and John von Neumann.   I’ve talked a little about Alan Turing in an earlier essay.   All three men knew each other, discussed their ideas with each other and promoted each other’s ideas. John von Neumann has been called the smartest individual of the 20 th Century.   Even an outline of his accomplishments, which you can read about in  Wikipedia, is hard to believe.   He invented game theory, which I discussed in two earlier posts.   He headed up a group of mathematicians who invented new statistical techniques at Los Alamos that made the atomic bomb possible.   In 1944, he wrote a memo that outlined the structure of the modern computer.   He then managed the design and building of a modern general computer and consulted on the building of virtually all the early computers. JOHN VON NEUMANN
Read more

The Roman Republic Commits Suicide: A Cautionary Tale for America

Image
Why Study Rome? Americans have focused on comparisons between Rome and America twice in American history.  The first time was during the period from before the Revolution to after the ratification of the Constitution and Bill of Rights, when the founding fathers and others looked to the Roman Republic for ideas and inspiration on how to structure the new government. After the American Revolution, the founding fathers, having read the Roman authors detailing the collapse of the Roman republic, worried about internal threats to the survival of their new republic.   The second time was when the United States became a superpower, especially after WWII, and then again after the collapse of the Soviet Union in 1991. Commentators compared America to the Roman Empire at the height of its power. There was some discussion about how America becoming a permanent warfare state would affect democracy and civil society. And now a third time. Have Americans an
Read more

“Pax Americana”: The World That America Made

Image
There are two kinds of empires: the kind that rules through ruthless exploitation, and the kind that seeks to induce allies into defending themselves through economic incentives. (George Friedman) INTRODUCTION America's power and influence in the world rests on three broad, interrelated bases: 1) Overwhelming military power that can be projected anywhere in the world,     supplemented by security arrangements with allies and supporters. 2) A large, innovative, dynamic domestic economy as the basis for global economic and technological leadership. The economy provides the resources and technology to support the military and a global foreign policy. 3) Claims to moral and ideological leadership and influence, particularly the promotion of liberal democratic societies and supporting political institutions. This post will discuss the economic aspects and related security objectives of American foreign policy. It will focus on the structure of the global
Read more