Does Demography Explain the Weakness of America's Recovery?

The Economist this week has an article whose subtitle is: "Demography may explain the weakness of America’s recovery." You know that I can't resist commenting on that titillating title. The first part of the story about the slowness of the American recovery is something that resonates with me: the economy is returning to a level that existed prior to the housing boom and bust, and that level was not great.

The notion that America’s potential growth has slipped is not new. Some economists have argued that the crisis itself undermined potential by starving innovative companies of financing and driving some workers, whose skills have atrophied from long spells of unemployment, out of the labour force. Mr Obama’s council [Council of Economic Advisors], however, makes a different argument: the lower trend was largely in place even before the recession hit.

This has been my perception all along. The economy was sluggish going into the housing boom, which is almost certainly why everyone jumped on that bandwagon--at last we had a solution to the slow economy. It was, of course, ephemeral. A few people are vastly more wealthy now than before, because they took advantage of the situation in some way or another, but most people are either not much better off, or are even worse off than before. And what about those jobs?

Since the end of 2007 the population over 16 has grown by 11.6m people and the labour force (those either working or looking for work) has grown by just 1.6m. As a result, the share of the population actually in the labour force has fallen from 66% to 63.5%, a tie for the lowest level recorded in more than 30 years. If the other 10m want to work but simply are not looking, they should arguably be included among the unemployed. But in fact, only a fifth of them say they want to work.

The White House council reckons demography is driving this drop. Labour-force participation is highest between 25 and 54; if the share of the population under 25 or over 54 grows, that will drag down overall participation rates.

This kind of thinking naturally ignores the fact that we live in a world economy, with a global labor force. A substantial share of middle-income factory jobs have gone overseas because wages are lower in China and other places. That has, of course, raised our standard of living, because so many things are now affordable that would not be affordable if people were being paid rich-country wages with benefits. That is just the demographic reality. 

Mr Obama wants to raise immigration levels. Reforming disability benefits and raising the retirement age would also help.

It isn't clear that more immigrants will raise productivity, but they offer a greater chance of doing so in the short-term than a rise in the birth rate. And, yes, as I've said before, I agree that raising the retirement age, and making sure that disability benefits go only to the truly disabled are good ideas to keep people in the labor force and being productive for as long as possible.