Will Fewer Babies Create Economic Challenges?

Will developed world markets meet their doom without a baby boom? Aging populations and declining birthrates in the eurozone and US are once again spurring concerns about the eventual economic impact. The argument: Aging populations mean fewer folks in the “working age” demographic (between 15 and 64). Fewer workers mean slower growing output, stagnation or worse. But demographics aren’t market drivers—nor do they predetermine economic gloom.

Markets move most on surprises. Population trends are well known, slowly morphing issues, allowing markets plenty of time to price them in. It isn’t as if a sudden dearth of workers is likely to surprise developed world economies. It was well known for decades that the Baby Boomers—the largest generation—would start retiring around 2011, when they began turning 65. Most folks are likely aware that the bulk of them will be out of the workforce by 2029, when all are 65 or older. Yet there are also some demographic positives hiding in plain sight. For one, the Millennial population is neck-and-neck with the Boomers—and rising, thanks to immigration. Many demographers expect Millennials to overtake Boomers this year. Birthrates increased quite a bit between Generation X and Millennials. That doesn’t get much attention. Nor does the fact that the US working age population has grown by about 6 million people since Boomer retirement began.^[i] But regardless, such glacial changes don’t materially affect the next 3 – 30 months, the sweet spot markets care about most. Any noteworthy demographic shift is likely to play out over much longer periods than this.

Folks cite Japan as evidence demographics fears pack an economic and market punch, but population trends didn’t cause Japan’s lost decade(s), in our view. That stemmed more from entrenched structural policy issues, including byzantine labor markets promoting lifetime employment (and burnout) over productivity; a dynastic system of cross-shareholdings preserving unproductive, unprofitable companies; banking system incentives keeping zombie companies afloat (and distorting competition from startups); the bloated Japan Post—the public bank that sucked capital away from the rest of the country; and multiple rounds of counterproductive quantitative easing. Demographic issues didn’t really factor, outside of the structural barriers to immigration.

Moreover, while long-term projections of population decline raise fears, they aren’t etched in stone. Many use straight-line math, simply extrapolating recent trends into the future. This ignores all the potential changes between now and then. Straight-line math projections in the 1970s, for example, might have missed the Millennial birthrate bump. What if birthrates pick up again as more Millennials enter prime marriage and childbearing years? Immigration could also increase, potentially boosting the size of the labor force. People’s desire to seek opportunity in the US is well-documented. How Congress might alter future visa programs is unknowable today. There just isn’t any way to know how such long-range population projections will play out. This isn’t a knock on demographers. Rather it is true of most long-range projections—numerous variables can change in ways nearly impossible to predict. 

Even if projections materialize, population trends don’t determine the economy’s destiny. Labor is just one input to economic growth—technology, capital and productivity matter, too. The classic technology example here is how Henry Ford’s assembly line chopped the Model T’s production time from half a day to two-and-a-half hours. In modern factories, robots do most of the heavy lifting, while humans focus more on oversight and machinery maintenance. On the non-manufacturing side of things, we are only at the very beginning of seeing how deep learning models can revolutionize artificial intelligence—and how that could impact productivity as well as the type of work people do in the future. Fueling all of this is billions upon billions of capital deployed by those seeking profits through problem-solving. The fruit of all this could eventually render smaller-workforce worries an afterthought.

In the meantime, folks are now living and working longer. Those 55 and older now make up over 23% of the workforce, versus less than 12% in 1990.^[ii] Surveys suggest most Americans expect to work past 65—beyond the common cut off for “working age” used in many studies. Work is now generally less physically demanding. The idea older workers are less productive is, in our view, a vestige of folks thinking heavy industry drives the US economy. Older workers in America’s services- and information-based economy could easily be more productive, reducing the need for quick labor force growth. Employment trends in the labor force now favor these workers. Since 1990, employment in knowledge-intensive and service-oriented sectors has nearly doubled while manufacturing employment has fallen by about a third, according to Pew Research. Less physically demanding work—focusing more on our brains than brawn—likely keeps aging Americans more productive longer, boosting growth potential.