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For economy, aging population poses double whammy

August 3, 2016

As Americans grow older, size and productivity of workforce suffer

Planning to retire in the next few years? Please reconsider: The economy needs you more than you know.

Economists have long expected an aging population to hamper growth for the simple reason that it means a smaller labor force. But new research has identified a potentially more powerful impact: Rapid retirements deprive companies of critical experience and knowledge, which undermines productivity across the entire economy. Demographics may thus be a critical factor in why the current economic expansion, which began as the first baby boomers qualified for Social Security, is the weakest on record.

The findings are contained in a new paper by Nicole Maestas of Harvard University and Kathleen Mullen and David Powell of the Rand Corp., a think tank. Because the 50 states are aging at different rates, they were able to tease out the impact of aging on economic growth. Their conclusion: On average, every 10% increase in the share of state’s population over the age of 60 reduced per capita growth in gross domestic product by 5.5%.

This came through two effects. First, as more workers retire, the labor force grows more slowly. This, they reckon, explains one-third of the 5.5% growth hit.

But the bigger effect was through reduced productivity—that is, output per hour—of the remaining workers. The authors found that this couldn’t be explained by emigration, mortality or an influx of younger, inexperienced workers. Rather, they found that everyone became less productive in an aging state.

So what explains this impact?

The authors note: “An older worker’s experience increases not only his own productivity but also the productivity of those who work with him.” All else equal, experienced workers are more productive. One study found that productivity peaks at age 50, when productivity is 60% higher than for the average 20 year old.

A journeyman carpenter doesn’t just work faster than an apprentice; he also helps the apprentice learn the tricks of the trade. New doctors diagnose patients more accurately under the tutelage of experienced practitioners. A rookie salesman learns the territory faster in the company of longtime veteran.

Of course, aging can also cut in the opposite direction. Older workers may be slower to adapt to new technology. If laid off from a dying industry, their experience may be irrelevant to a new one. Older workers are more likely to suffer from injury or illness and less likely to have a college degree.

But these disadvantages have shrunk: The average 60-year-old in the 2000s was as healthy as the average 55-year-old in the 1970s, and in many occupations, cognitive skill matters more than physical stamina.

Since college enrollment began climbing steadily in the 1980s, older workers today are increasingly likely to have a degree.

So how much has aging hurt overall growth? In the past five years, the labor force grew just 0.6% per year, half the rate of a decade earlier, much of it due to retiring boomers. Meanwhile,​productivity ​grew just 0.5%​ per year, the second-weakest such stretch since the 1950s. The productivity slowdown is a puzzle. Businesses appear reluctant to invest due to financing constraints, a dim sales outlook or a paucity of exciting new innovations. The new research suggests retirements could be part of the story. By applying their state-level findings to the whole country, the authors estimate that aging will reduce growth by 1.2 percentage points between 2010 and 2020, with two-thirds of the effect attributable to reduced productivity.

This could also explain the weakness of wages. When experienced workers retire, their younger, less-productive replacements earn less. Hourly wages are up just 2.6% in the past year, but up 3.6% when adjusted for the shifting demographic makeup of the workforce, according to the Federal Reserve Bank of Atlanta.

To be sure, the precise magnitude can be debated; most countries, regardless of demographic profile, have suffered a productivity slump. Nonetheless, anecdotal evidence is supportive. Many employers say they aren’t short of skills but experience.

“As your employees who have been working in manufacturing start to retire, you’re not just losing people, but that knowledge and experience is walking out the door,” says Jenny Stupica, human resources manager at SSP Fittings Corp., a Twinsburg, Ohio supplier of hydraulic fittings and a board member of ConxusNEO, a regional workforce development group. She said people with basic skills and aptitude for math and mechanical learning can be trained to do manufacturing work, but what her company really missed was experience.

This all adds to the urgency of overhauling both the private and public pension systems to encourage later retirement, by shifting benefits to favor later retirement and reducing tax penalties on earnings for those who are already collecting Social Security. The payoff: a more solvent pension system and a more productive economy.

Read original article here.

“For Economy, Aging Population Poses Double Whammy” The Wall Street Journal. Retrieved from http://www.wsj.com/article_email/for-economy-aging-population-poses-double-whammy-1470249965-lMyQjAxMTE2MTExMDExODA2Wj  (3 August 2016).