New York: The next downturn won’t look like the last one. For one thing, US labour force demographics were a drag on economic growth last time, but they should help minimise economic weakness this time.
The key factor when thinking about the interaction between labour force demographics and the economic cycle is the role played by the babyboomer generation — because of their sheer numbers. The population bulge of people born between the early 1940s and the early 1960s is visible both in population data and in the labour force data.
Because people tend to act differently at different phases of life, as the boomers have passed through their working years they have distorted the economy.
Babyboomers acted as a drag on the economy in the aftermath of the great recession because it occurred during the peak saving years of the generation. Saving rates tend to be higher for older workers because older workers have higher incomes than younger workers do, they’re more focused on saving for their approaching retirements than younger workers, and because the bulk of their spending on raising families may be behind them.
When the bulk of the growth of the labour market is occurring because more older workers are working longer, as it has been for the past decade, this acts as a relative drag on economic growth overall because these older workers are saving for retirement rather than demand-generating activities like buying houses and raising families.
After the great recession, some referred to the 2000s as a lost decade for employment because there was very little net job growth during that decade. For younger workers — those under say age 55 — things have been much bleaker: From April 2000 until today there has been essentially no net growth of employment for workers under age 55.
Over that same time, employment for workers over age 55 has doubled. That’s how much of an impact the ageing of the babyboomer generation has had.
But this is about to change. Perhaps as soon as this year, employment of people over the age of 55 should peak, after which it would decline for the next 15 years.
We know this because the same pattern has played out for every other age bracket that babyboomers have passed through.
The pattern has been 23 years of growth for an age bracket followed by 15 years of decline. This accounts for the size of the babyboomer generation (23 years) followed by a 15 year lull until births began to pick up in the late 1970s. The age 25 to 34 labour force grew from 1966 through 1989 then declined for about 15 years.
The age 35 to 44 labour force grew from 1974 to 1997 then declined for about 15 years. For age 45 to 54 the growth period was from 1984 to 2007. And for age 55-plus the growth wave began in 1996.
This matters because a mild labour market downturn, or a multi-year period without much net job growth, may not feel like much of a downturn at all if it’s happening during a time when the number of older workers is shrinking. As Bill McBride of Calculated Risk has pointed out, in 2020 the three largest age cohorts of Americans are going to be 25 through 29, 30 through 34, and 35 through 39.
These are the consumption-intensive family formation years. Older workers retiring, with those jobs, promotions, and raises being taken by younger workers, could act as a stimulus and keep any downturn mild and short.
There are a variety of reasons the economy may have disappointed Americans since the year 2000, from bubbles to policy errors to debt overhangs. But to the extent that demographics and an ageing workforce have contributed, the future is looking bright.