The U.S. Demographic “Advantage” Reconsidered

June 10, 2013

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http://blogs.cfr.org/renewing-america/2013/05/13/the-u-s-demographic-advantage-reconsidered/

In the litany of Washington debates about current and future U.S. economic competitiveness, demographics is consistently placed on the advantage side of the U.S. competitiveness ledger. A broad view of the macro demographic trends—taking into account only population growth and age-profile—would indeed seem to support this claim. Yet this ignores other U.S. trends that could strike a blow at worker productivity, undermining the potential economic advantage of favorable demographics.

Economists use a handy formula to roughly calculate GDP growth: labor force growth x productivity growth. This means that to keep an economy growing, either the labor force or productivity need to expand (or there must be an expansion of one to compensate for any contraction of the other). A population’s age-profile matters, too. It’s best to have the bulk of a population be of working age. That way there are fewer nonworking, and therefore unproductive, children and elderly putting a burden on the economy.

At least compared to major economic competitors, the basic contours of U.S. demographics appear favorable, satisfying the labor force component of the GDP growth formula. Thanks to immigration and a lofty birthrate, the number of Americans aged 25 to 64 will continue to grow at a slow and steady pace for decades, with the age-profile relatively stable and concentrated in those ages. Most major European and East Asian countries face the (historically unprecedented) prospect of steadily contracting workforces and sharply older populations within a few decades. China and South Korea are in especially unenviable positions; thanks to stunning declines in fertility, their populations will age faster than any in human history.

But a more complete telling of the U.S. labor force position is less rosy. What matters more than raw working-age population numbers is the share of the working-age population that is actually working or seeking work, otherwise known as the labor force participation rate. Here the United States compares less well, especially for men. Employed Americans do indeed work longer hours and take fewer vacations than employed Europeans. But as Nick Eberstadt lays out in his superb book A Nation of Takers, American men in their late thirties are actually more likely to go on permanent vacation; their labor force participation rate is lower than their counterparts’ in nearly every European country—including in debt-riddled and welfare-bloated Greece.

Productivity growth—the other component of the GDP growth equation—could be more difficult to muster in the United States as well. Productivity improves when fewer inputs are needed per unit of output. Smart, capable, vigorous workers (i.e., good human capital) help drive productivity higher. In other words, it’s not just the size of the labor force, but the quality of the labor force that counts. In the 2000s, the productivity growth of the U.S. labor force was more or less on par with that of the Japanese and European labor force. That may soon change.

The U.S. population is losing its edge on educational attainment. According to the OECD, Americans aged 55 to 64 are among the best-educated in their age group in the developed world in terms of high school and college completion. Americans aged 24 to 35 are solidly in the middle-of-the-pack. And uniquely among nations, the cohort entering the U.S. labor force is no more educated than the cohort currently retiring.

Health trends are also worse in the United States. Around 1950, Americans, and particularly American white women, were among the longest-lived and healthiest in the world. Now it’s flipped. A recently released report by the Institute of Medicine found that, compared against sixteen other “peer” countries, Americans have among the worst life expectancy and health at every age and income level. According to demographer S. Jay Olshansky, the United States could be the first rich country to experience declining average life expectancy—which at present is reserved to former Soviet countries and Sub-Saharan Africa. Least-educated white Americans are already experiencing a drop in life expectancy, and at a rate that is astounding demographers.

In a less understood trend—and one which is certainly less reported on in the media—Americans’ romantic relationships are comparatively unstable, with real negative consequences for American children. Studies have shown that relationship transitions (i.e., when a parent switches from one partner to another) are especially damaging to children—even more than being raised by a single mother without any partners. Americans have historically married more, divorced more, and have had shorter-term cohabitations than Europeans. But the differences in relationship stability are larger now than they used to be. In a study from the mid-1990s, 12 percent of American children had experienced three or more parental partnerships by age fifteen. The next-highest, in Sweden, was just 3 percent. It is likely, if not certain, that the gap has widened in the past two decades.

Taken together, these trends—male withdrawal from the workforce, stagnating educational attainment, worsening health, and increasingly unstable living arrangements for children—could well take the edge off the U.S. demographic advantage.

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