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The false-alarmists behind this shrinking population panic

March 11, 2013 • United States, Daily Email Recap

The false-alarmists behind this shrinking population panic
Policy-making elites would have us believe a smaller workforce spells the end of prosperity. Actually, it spells redistribution

See: http://www.guardian.co.uk/commentisfree/2013/feb/26/false-alarm-shrinking-population-panic

The retirement of the baby boom cohorts means that the country’s labor force is likely to be growing far more slowly in the decades ahead than it did in prior decades. The United States is not alone in facing this situation. The rate of growth of the workforce has slowed or even turned negative in almost every wealthy country. Japan leads the way, with a workforce that has been shrinking in size for more than a decade.

Slower population growth is affecting the developing world as well. Latin America and much of Asia are seeing much slower population growth than in prior decades. In China, the one-child policy adopted in the late 1970s has virtually ended the growth in its labor force.

According to many media pundits, this picture of stagnant or declining labor forces is cause for panic. After all, it means that countries will be seeing an increase in the ratio of retirees to workers. Countries around the world will be suffering from labor shortages. And with even developing countries experiencing slower population growth, there will be nowhere to turn to make up the shortfall.

The only part of this picture that should, in fact, be scary is the failure of people involved in economic policy debates to have even a basic understanding of economics and arithmetic. There is no reason why the prospect of a stagnant or declining workforce should concern the vast majority of people. Rather, from the standpoint of addressing global warming and other environmental problems, this is great news.

First, a bit of arithmetic would be useful. People involved in economic policy-making tend to have problems with arithmetic, which is why they failed to recognize the housing and stock bubbles. Some simple sums can quickly show that the concerns about falling ratios of workers to retirees are ill-founded. In the United States, the social security trustees project that the ratio of workers to retirees will fall from 2.8 in 2013 to 2.0 in 2035.

It’s pretty simple to figure out the impact of this decline. Let’s assume that an average retiree consumes 85% as much as the average worker. This means that our 2.8 workers must produce enough goods and services to support the equivalent of 3.65 workers. That would imply each worker gets to keep 76.7% (2.8/3.65) of what they produce, with the rest taken away through taxes or other mechanisms to support pesky retirees.

When the ratio of workers to retirees falls to 2.0 then each worker will get to keep 70.2% (2.0/2.85) of what they produce. This implies a drop in the share of output going to workers of 8% over the next 22 years.

While that would depress living standards, we will also be seeing an increase in potential living standards from rising productivity growth. If productivity grows at the rate of 1.5% annually – roughly the rate it has been growing over the last two decades – then productivity in 2035 will be almost 40% higher than it is today. This means that the fall in the ratio of workers to retirees will take back less than a quarter of the potential gains from productivity growth. (It’s true that most workers have seen little benefit from productivity growth over the last three decades, but this points again to the importance of intra-generational distribution; it’s not a reason to be distracted by demographic nonsense.)

Click here to read the full article: http://www.guardian.co.uk/commentisfree/2013/feb/26/false-alarm-shrinking-population-panic


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