Productivity: The demographic tipping-point

Real, per-capita GDP growth has averaged about 1.7% in Canada over the past 30 years - where has it come from? A less-than-exhaustive but more-than-cursory examination of the data suggests the following breakdown:

Source	Contribution
Technical progress:	0.9%
Capital deepening:	0.5%
Decrease in hours worked per week:	-0.2%
Increase in employment rate:	0.25%
Increase in working-age population:	0.25%
Total:	1.7%

We already know that the 0.9% technical progress number is nothing to be proud about, and we could probably do better in the way of fixed business investment. What intrigues me is those last three terms.

Almost all of the decrease in hours worked per week took place in the 1970s, so there's not much to say there. It hasn't moved much since then, and I don't see any reason to suppose why it will again.

The increase in the employment rate is of course due to the entry of women into the labour force. In 1976, 42% of women over 15 were employed outside the home; by 2004 that proportion had risen to 58%. (During this time, male employment rates declined slightly from 73% to 68%.)

The increase in the size of the working-age population reflects the entry of the baby boom into the labour force.

Put together, those last two demographic phenomena have contributed half a percentage point to economic growth in Canada. That doesn't sound like a lot, but after 30 years, it means a GDP per capita that is 15% higher than it would have been without them.

But here's the thing: these trends can't and won't continue. Female participation rates have already started to level off: the women who were at the beginning of that trend are now starting to approach retirement age. We can't expect employment to keep growing faster than the working-age population for much longer. That quarter-point of extra growth is going to disappear fairly soon.

And everyone knows that the baby boomers are also approaching retirement, so the relative size of the working-age population is going to be decreasing. And it's going to happen soon: according to Statistics Canada's projections, the number of people between the ages of 15 and 64 will peak in about 5 or 6 years, and will then decline sharply. That extra 0.25% in growth is not only going to disappear, it's going to go negative: the decline in the size of the labour force will reduce per-capita growth rates by about 0.4%

Until now, demographics have helped economic growth in Canada. But within the next decade, they're going to stop adding 0.5% to growth rates, and start reducing them by 0.4%. If nothing else happens, economic growth is going to reduced by half.

Update: Today's Globe and Mail has a story about a recent Conference Board productivity report, complete with a table attributing gold, silver and bronze medals for countries' performances in various categories. I suppose that they're trying to communicate with a broader audience, but the fact they the Conference Board feels obliged to descend to this level is a depressing commentary on the level of sophistication at which this debate is being discussed. What's next? A happy-face/frowny-face index?

Comments

[Brian Ferguson]

Actually, we already use smiley faces/frowny faces on some hospital report card exercises.

[Stephen Gordon]

:)