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.

[I'm taking a break from blogging over the holidays, and recycling some earlier posts. This one was first published on October 18, 2005.]

Comments

[Just visiting from macleans]

It's a shame your previous post - We are all Albertains - didn't look at net migration and employment in "Alberta's" oil sands in terms of demographics. It might have told us something about what skill set the "putty-clay" can be expected to have when all of the capital spending on infrastructure and related activity slows down within the next decade.

Coincidently, Indira Samarasekera, the president of the University of Alberta, in a front page G&M story just a few weeks ago, spoke openly about this demographic shift as it affects her institution. I can't find the original source, but this editorial followed the next day:

Indira Samarasekera, the president of the University of Alberta, was right to show concern for the future education of Canada's young men, the subject of a front-page story by Elizabeth Church in yesterday's Globe.

The barbs that have been directed at Ms. Samarasekera are unwarranted and shortsighted. She warned that the country's universities are unwittingly building a "demographic bomb": for the first time, men are noticeably underrepresented at Canadian universities, accounting for only 42 per cent of their students despite making up half the nation's population.

She worries "that we'll wake up in 20 years and we will not have the benefit of enough male talent at the heads of companies and elsewhere," she said in October. And she promised to use her status as a South Asian, female university president "to be an advocate for young white men, because I can be. No one is going to question me when I say we have a problem."

http://www.theglobeandmail.com/news/opinions/editorials/the-male-minority/article1392251/

Ms. Samarasekera may be in the eye of the storm - roughly 450 km southwest of Fort McMurray.

[Agent Continuum]

Over 30 years it would be worth looking at human capital/schooling/the Mincerian stuff also. How much of the extra productivity comes from better schooling composition?

Finally, what are you doing with the covariance term? If physical capital runs into decreasing returns then it makes no independent contribution to real per capita income in the long run.

[Jim Sentance]

I can't help but think that the way our economy has evolved over the past 30 years is in good part due to the demographics - businesses responding to a growing supply of labour that keeps wages relatively low, and governments obsessing about where we're going to find jobs for all these people.

Isn't it obvious that we can't and shouldn't project a past like that onto a future that is going to face a very different demographic reality? Labour shortages will replace surpluses, wages will rise and business and government will adjust their practices and policies. There might be some upset in the short term as its a fairly dramatic turnabout coming, but life will go on.

[Stephen Gordon]

I guess the problem is more that although we can expect income per *worker* to increase, income per *capita* will slow down. Things like pensions (the ones that aren't fully-funded) and health care may become expensive.

[Declan]

"If nothing else happens, economic growth is going to reduced by half."

So what?

[Nick Rowe]

Declan: "So what?"

Not a bad point, actually. (And very succinct!) Maybe the answer to your questions is that we shouldn't be surprised if it happens, and shouldn't be overly concerned either. But Stephen's point about things like the unfunded pension and healthcare liabilities would be one reason for concern.

[Declan]

My biggest concern is that the credit/debt driven monetary system we have needs a certain amount of growth in order to function properly, I feel that the pension/healthcare issues can be dealt with without too much pain, although it's certainly a legitimate point of concern.

But aside from these sorts of 'indirect' issues, I don't really see a problem with Canadians on aggregate putting in fewer hours of work and getting less growth as a result.

[Jim Sentance]

I should add, I think it will be more than just higher incomes per worker. I think you will see increased participation from groups that have participated less, so the overall increase in dependency will be less than you'd assume from current patterns. More older people working for example.

[westslope]

Joyeux Noël et bonne année à tous. Peace and prosperity for all. -w

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macleans: These resource booms pull young men out of school and into the labour market. The anecdotal evidence abounds. I'm not sure just how significant that is or how successfully young men stranded by resource busts recycle themselves.

Nice thing about commodity-driven booms is that productivity can decrease and everybody still makes money as a long as the party lasts. In fact, any increases in shirking that might occur at unionized mines, for example, probably don't get fully dealt with until the next bust when tight labour markets typically loosen up.

[just visiting from macleans]

Well, if they all live in Atco trailers and are just modern day buffalo hunters, moving where the herd goes, probably its not such a big deal. I think it may go deeper than that though. Alberta's economy is based on building things. Houses, infrastructure, and massive and extensive capital projects (a more recent phenomena). Maybe they just cash out and move to the Okanagan. Don't know what that does to the people left behind who bought expenses houses that were bid up during the boom.

Alberta's economy reminds me of the Winchester Mystery House - once you stop building, you die.
http://en.wikipedia.org/wiki/Winchester_Mystery_House

[CBBB]

The complete lack of interest in developing human skills by Canadian companies is the major problem here. A university degree is next to useless in Canada, even one in a "technical" field. Canadian companies have NO INTEREST in training new graduates what-so-ever, the number of new graduating training programs run by Canadian employers pales when compared to the UK or USA.
You're a new graduate and you want a job? Better have 3 years directly related experience or else leave the country.
This pervasive attitude probably explains a lot of Canada's weak technical progress. As for the declining proportion of young men at university - it goes hand-in-hand with the above problem. Even though the role of women in the labor force has grown dramatically, society still places a heavy emphasis on men being the breadwinners. Since degrees tend not to pay off in Canada, the social costs of pursuing them are much higher for men then women.

[Tom West]

Since degrees tend not to pay off in Canada, the social costs of pursuing them are much higher for men then women.

CBBB, do you have a pointer to data backing this claim? I've always assumed that returns to a degree roughly followed the American standard (and we seem to assume that similarity when shaping our economic policy). If the data shows otherwise, I'm all ears.

[CBBB]

No data, only anecdotes. I really doubt if this issues has been looked into - and I think it should be. As someone who graduated from a Canadian university relatively recently I am very familiar with the poor attitude of Canadian companies towards new graduates. I really think the assumption that the returns to a degree in Canada follow the returns in the USA is a very faulty assumption.

[westslope]

Don't take that personally CBBB. You lack experience. Learn-by-doing increases productivity and worth to employers.

You can always compensate by a) selling yourself really cheap, or b) selling yourself even cheaper by doing volunteer work, or c) go to some gawd-foresaken corner of the earth and get a job where few others want to work.

After a few years of slaving away at 3rd world exploitation, bare subsistence rates, you will slowly accumulate experience and may eventually command more respect.

Are you trained as an analyst? You can jump start this process by strutting your stuff with the publication of an insightful op-ed essay in a national newspaper.

[John Robertson]

In BC, GDP per capita declined in the 90s while BC Provincial GDP grew. There are many external costs to GDP growth in declining quality of life and damaged environment that are not measured by GDP. Population growth is one source of GDP growth. However Canada should pursue population growth (now only possible through our immigration policy) only if the wealth and quality of life of the average Canadian is improved. Education and productivity improvements have the potential to improve the welfare of all Canadians if they is not undermined by the substitution of cheap imported labour.