You can't escape demographics. Quit whining and deal with it.

As you get older, your productivity will, eventually, decline. If you live long enough, you will reach a point when you can no longer provide for yourself.

You cannot bake bread when you are young, bury it in the ground, and then dig it up and consume it when you are old. In your golden years, you must rely on someone younger and fitter to bake bread for you.

In every society, the old have some claim on the resources of the young. Only the nature of the claim varies.

The oldest form of claim is kinship: children bake bread for their aged parents.

Over time, other methods of caring for the elderly have evolved:

Charity: religious or volunteer organizations can give the elderly bread.

Government: the state can tax the young, and use tax revenues to provide bread for the elderly.

Accumulate assets that last: people can buy gold when young and bury it in the ground. When they're old, people dig up the gold and exchange it for bread.

Capitalism: people can invest in bakeries, and receive bread in their old age in exchange for their capital investment. 

Each one of these strategies is vulnerable to demographics.

Imagine what happens, under each scenario, when there is a large increase in the number of old - by which I mean people who are unable to bake their own bread - relative to the number of young.

Kinship breaks down. China is a case in point. Think about the caregiving responsibilities of a Chinese woman born under the one child policy. She must look after her own parents if they become sick or infirm (who else will?). If she marries, she is also expected to look after her mother- and father-in-law. Plus she must care for her husband, and any children they have. No wonder The Economist is writing about the Asian flight from marriage. 

Charity - well, it was never a reliable source of support in old age anyways.

Tax-financed supports for the elderly are also vulnerable to demographics. Yes, taxes can be raised to provide bread for large numbers of elderly folks, but there is a limit to how much revenue can be raised from a given tax base. Eventually bread rations may have to be cut.

Accumulating assets -- burying gold in the ground-- doesn't protect one from demographic forces either.  If you're a member of a large generation, then everyone else will be digging up their gold and trying to exchange it for bread at the same time as you are. The price of gold will fall, the price of bread will rise. (Substitute housing for gold if you wish). 

Investing in productive assets -- buying shares of Husky Oil, say -  may a better strategy than burying gold in the ground. More money invested in the Canadian stock market could lead to higher levels of capital investment, and raise the productivity of younger workers, so there is more bread to go around for everyone.

But if everyone tries to exchange their Husky Oil shares for bread at the same time, the price of shares will go down. More generally, with greater availability of capital, the returns to capital would be expected to fall, while the returns to labour -- and the wage rate -- would be expected to rise. Higher wage rates make it expensive to hire someone to bake bread for you.

Now with perfect capital mobility one should be able to achieve a return on capital equal to the world interest rate. Unless the entire world is experiencing a demographic crisis at the same time, it should be possible to maintain a decent rate of return on capital. Yet even if every Canadian senior can achieve a reasonable rate of return on investments, the fact remains: there aren't many young people around to bake bread. You can't import it - it gets stale. With lots of people looking to buy bread, the wages of younger workers will get bid up - again, it's impossible to escape demographics.

Individuals can do a few things at the margin to improve their position - move to some place with more favourable demographics, adjust the timing of labour market entry by staying in school for longer or graduating more quickly,working out and trying to keep on baking your own bread as long as possible.

But inevitably some generations will do better than others. Barring substantial technological change, Canadians who retire in the 2030s, when the number of old relative to the number of young is at its peak, are unlikely to enjoy as high a standard of living in retirement as people who retired in the 1990s, when there were few old relative to the number of young. (Though technological change does happen. Think about Wii Bowling, for example).

The point is: there's no cure for demographics. You can't escape. There's no point in whining about Ponzi schemes or "I'm getting a lousy return on my social security investments." It's happened. The first generation of Social Security recipients enjoyed a massive windfall gain. There's nothing that can change that fact. It's over.

Quit whining and deal with it.

Comments

[Richard McFarlane]

What if I adjust my life expectancy to an expenditure rate that maximizes my comfort, i.e., my life expectancy is adjusted downward? That would work.

[Stephen Gordon]

The idea that demographics were responsible for the huge run-up in stock prices after 1990 or so always seemed to be the most plausible explanation. At least, the most plausible one I had heard of.

[CBBB]

Well...having society invest to expand the productive capacity of the economy would be helpful you could just produce more bread overall. Unfortunately with rampart under-employment and under utilization of resources this is something that isn't being done.

[Frances Woolley]

Richard McFarlane: "What if I adjust my life expectancy to an expenditure rate that maximizes my comfort"

Don't joke. Euthanasia is going to be the next abortion, by which I mean the next deeply morally controversial and divisive issue.

Stephen - you saw it all long ago! Interesting post.

CBBB - yup.

[Stephen Gordon]

The problem with the demographic story was that it was simply one of a single data point: the baby-boomers hit prime earning/saving years, and asset prices went up. You could tell a story, but you couldn't really test it or compare it to alternative theories.

[Frances Woolley]

Stephen, that's why we blog. To tell stories about single data points.

[rsj]

I think, in practice, the bulk of our output is generated in industries that have increasing returns to scale, in which case demand is the main constraint. For example, look at concentration ratios. //www.census.gov/econ/concentration.html

If all those retirees rush out and spend, then aggregate wealth and consumption may well increase.

Which is not to say that those industries which do not have increasing returns -- e.g. haircuts, waiters -- will not see their relative price increase. But that's OK. We can shift our consumption to spend less on TVs and more on haircuts, which is what has been happening, while continuing to consume more.

So cheer up, demographics could be made into a blessing rather than curse, with appropriate transfers.

The perfect example is Japan, which has been suffering from deflation and excess capacity even as the labor force has been shrinking and the number of retirees has been increasing. There doesn't seem to be a shortage of consumption. They are desperate to ship output overseas and import demand, which is a strange problem for a country to have if it is suffering from a declining labor force. At least, it seems strange to me -- perhaps the reason is clear to someone else.

Similarly, Germany, whose economy has a large manufacturing component, needs to persistently be a net exporter in order to employ everyone.

In practice, a shortage of stuff doesn't seem to be a problem for modern industrial economies.

Perhaps things like Peak Oil or other constraints will change this, but I am skeptical.

[Frances Woolley]

rsj: That's an interesting point and one I hadn't thought of. Thank you.

"If all those retirees rush out and spend, then aggregate wealth and consumption may well increase."

That's the big if. Evidence suggests that people don't like spending down their assets - see this post on retirement savings accounts.

[Lord]

A massive windfall gain really relies on deficient accounting by looking at Social Security in isolation. They also raised more children, educated them, built more infrastructure, paid more taxes to do so, and grew the economy more. Now, population growth is easier than productivity growth and it is less expensive to raise children than care for the elderly but their gain was not as much as simple calculations show.

[rsj]

"Evidence suggests that people don't like spending down their assets"

Absolutely! Which is why need to maintain their income via benefit payments rather than expecting them to spend down their assets.

No one likes to spend down their assets, no matter the age; it is much more efficient to engage in direct income provision for the elderly rather than expecting them to time their own deaths in such a way as to arrive at the stereotypical lifecycle savings behavior.

[Determinant]

Following on to CBBB, since we do have rampant unemployment, particularly among youth and idle capacity we have a huge free lunch sitting right there, or here. Lots of us in that free lunch, like me, would like to be served up on a platter and munched on, er, employed.

If demand from from more aged cohorts can't translate into employment for youth then we are going to have one hell of a generation fight on our hands.

I don't think the young would mind supporting the elderly so much if in doing so they could get work and actually have a shot. But such is not the case.

[Simon van Norden]

Well, in a perfect world (okay, in some economist's model) labour would be perfectly mobile. Young people would move to where the wages of young bakers were being bid up by lots of old people demanding bread.

More realistically, I'm wondering how big immigration has to be to make a dent in the demographics. Anyone know? Let's assume that we only let young workers into the country...

More generally, we'd probably admit that the demographics are not cast in stone. Retirement decisions respond to financial incentives; that affects the dependency ratio, as does immigration policy (eventually.....I think.)

[Determinant]

Stephen had a nice graph on the demographic gap a month back.

Immigration is not enough to affect our demographics. It will not reverse our situation unless we bring in 15 million people aged 45 and under.

If I remember correctly, if Canadians had kept on having children at the same rate we did in 1965 we would have a population of 50 million by now. We currently have 34 million.

We are missing 15 million people.

[JW Mason]

Lots of words. No numbers.

Let's do an exercise. How much does productivity need to grow to compensate for the increase in the share of the elderly over some horizon? And how much do we actually expect productivity to grow over that horizon?

The problem is not demographics. Our children can pay for the additional pension costs demographic change implies with just a small fraction of the additional wealth they'll have by virtue of inheriting our additions to the collective store of technical knowledge.

The problem is that the rich don't see why the non-rich should have a secure retirement.

[W. Peden]

Determinant,

Or you had too many children in the post-war era. It's another tradeoff: you can have generational equity with (relatively) equal-sized generations, but as rsj says: if you want to have unequal size generations then you can't do the whole "generational equity" malarky; there have to be income transfers (assuming that we rightly reject the alternatives, like poverty for the elderly).

I don't have the figures to hand, but until the baby-boomer/generation X dilemma, would it be fair to say that (at an individual level) generational inequity was the other way around: there were fewer parents providing for their children (who, in industrial capitalist economies, would usually grow up to have a much higher standard of living) and the higher ratio of children to parents would mean that the individual burden on caring for one's parents in retirement would be lower than the burden a parent would have raising 3-10+ children to adulthood.

It's a great thing that baby-boomer women didn't have to spend decades of their lives as baby-producers. The downside is demographic inbalance (unavoidable?). As Frances Woolley says, it's happened. Paul Samuelson got things wrong again. There won't be any perfect answer to the question "What now?".

[Determinant]

No argument here, JW Mason. That's why I joined the NDP.

Another of Rob Carrick's posts on the Globe, which kicked off Frances' previous thread which led to this one is that wage increases compared to productivity and corporate profit growth since 1980 have been atrocious.

Economists are wrong when they claim wages are costs. Stephen made that point and his missed the bigger point: in our society we distribute wealth and income primarily through wages and other employment-related compensation. Low wage growth leads to more income stratification.

This plays right in to the fact that our progressive income tax system really isn't progressive once all the extra fees, levies and surcharges for dedicated-fund programs like EI are added in. Bring back the progressive income tax system I say!

[Mike Moffatt]

Great post! Once you start thinking about demographics, it's difficult to think about anything else. The elephant in the room.

Also, now I really want to see Logan's Run again.

[Sean]

As one of the youngin's, let me question your initial premise: "If you live long enough, you will reach a point when you can no longer provide for yourself."

Can you see how that standard has changed significantly in the past 50 years? You're right -- it was common to work until you could no longer provide for yourself. Do you see how that standard changed from an easy age-cutoff when health and longevity improved?

If you want to go back to that standard, I'm sure you'll face much more unrest than any other reformers.

[anon]

W. Peden, yes, smaller generations over time (as in boomers to X) imply that total wages accruing to young folks are lower. But it also means that future population will be lower, so land/resource rents decrease and the per-capita standard of living improves. Overall, it's not obvious that retired folks will be worse off.

[Stephen Gordon]

Our children can pay for the additional pension costs demographic change implies with just a small fraction of the additional wealth they'll have by virtue of inheriting our additions to the collective store of technical knowledge.

No, they can't. Not without a *tremendous* increase in output per worker.

eta: Not to mention a tremendous increase in their willingness to pay higher taxes.

[Frances Woolley]

Sean: "As one of the youngin's, let me question your initial premise: "If you live long enough, you will reach a point when you can no longer provide for yourself.""

Fair comment. The effect of having a standard retirement age was to keep people at work until 65 and then boot them out. It's going to be really interesting to see how eliminating that standard will work out in the long run. Because productivity does fall, and our labour market institutions aren't set up to cope with that. But that's a subject for another post.

Mike, thanks. I agree.

JW Mason: "Our children can pay for the additional pension costs demographic change implies with just a small fraction of the additional wealth they'll have by virtue of inheriting our additions to the collective store of technical knowledge."

Perhaps. There's these robots the Japanese are inventing to care for old folks, they might do the trick. I'm hoping. On the dark side, however: population growth. environmental degradation. climate change. peak oil. no fish. (Sorry to be so depressing)

I agree with you very much, however, on the distributional issues.

rsj: "No one likes to spend down their assets, no matter the age; it is much more efficient to engage in direct income provision for the elderly rather than expecting them to time their own deaths in such a way as to arrive at the stereotypical lifecycle savings behavior."

I should add this to my list of "overlooked failures in pension markets" - it's basically a form of loss aversion, I think, people really hate giving up assets that they've worked hard to get.

Determinant: "If demand from more aged cohorts can't translate into employment for youth then we are going to have one hell of a generation fight on our hands."

I wonder. Could be. Or will the youth just fight against each other in the search for jobs (see, e.g. far right parties in Europe)? Or opt for alternative reality?

[Frances Woolley]

Anon: "But it also means that future population will be lower, so land/resource rents decrease and the per-capita standard of living improves. Overall, it's not obvious that retired folks will be worse off."

Since the average Canadian retired person has a large percentage of their wealth in housing, a decrease in land rents has to hurt. Big time. That's the exchange-gold-for-bread paradigm.

[Martin]

"Barring substantial technological change, Canadians who retire in the 2030s, when the number of old relative to the number of young is at its peak, are unlikely to enjoy as high a standard of living in retirement as people who retired in the 1990s, when there were few old relative to the number of young. (Though technological change does happen. Think about Wii Bowling, for example)."

Well that's the question, how much does technological change contribute to growth and how much does population? Of course these interact, but there are limits to technological change. One could therefore argue that were it not for those 15 million missing in Canada, and similar numbers as a ratio of the population in other countries, that young people would be worse off as technological change would not be able to keep pace with population.

How plausible would that be? Just imagine a western/developed world with 50% more population, that's ~ 500 million people. Think about the pressure nations like China and India are exerting on scarce resources right now and imagine 500 million people consuming twice to thrice the resources: that's like another China or India right there. I am not sure whether technological change would then have outpaced population.

[Martin]

twice to thrice the resources means of the average Indian/Chinese.

[Livio Di Matteo]

Of course, there is always the possibility that demographic imbalances can be addressed with more immigration. There are parts of the world with very young demographic profiles. As well, within Canada, the aboriginal population has a much higher birth rate. I think the demographic future of Canada is more fluid than we might expect and population will not necessarily decline as a result of current aging trends.

[Frances Woolley]

On immigration, from Stephen Gordon's earlier post:

Reshaping the population profile so that it is non-increasing throughout involves adding an additional 6 million people. And there's not much point in talking about gradually increasing immigration: the hole increases by 200,000 per year as the population peak moves to the right.

Higher immigration rates can't hurt and will likely help. But we shouldn't be under any illusions about just how effective increased immigration will be in dealing with population aging.

I disagree with Stephen only to the extent that I'm much more pessimistic (no surprise there). Immigrants to Canada usually come from countries with far lower personal income tax rates than Canada has at present. With far less by way of government programs for the elderly than Canada has. With (sometimes) corrupt and/or totalitarian and/or dysfunctional governments. It seems a bit of a stretch to think that people who come from such countries are suddenly going to be just perfectly o.k. with paying an effective marginal tax rate of 30 or 40 or 50 percent. For programs that don't benefit them or their parents now, and don't necessarily fit with their values.

[Mike Moffatt]

Unless, of course, Perry wins in '12 and we get a raft of Democrats immigrating to Canada.

[dBonar]

Technology could make it easier for a smaller number of people to bake more bread. That could mean the old still having affordable bread even as the ratio of old to young gets larger.

That doesn't address the social issue though. If the young see more and more of the world living off of their efforts, are they likely to demand that they get the good life _now_ rather than having to wait until they are old? Perhaps even enough of them making that choice so that the

old + 'retired'
---------------
young - 'retired'

ratio grows large enough to overcome the assumed productivity gains.

I guess I'm saying I think it is more than just an economics problem.

[Frances Woolley]

dBonar: "That doesn't address the social issue though. If the young see more and more of the world living off of their efforts, are they likely to demand that they get the good life _now_ rather than having to wait until they are old?"

Economists typically assume that workers get paid the marginal product of their labour. Now if one worker + one machine can make 1000 loaves of bread, what's the marginal product of that worker? As you say, why shouldn't they get paid more?

Mike: Slate had the best video ever on this. Their slogan to attract American democrats: "Canada: Secular. Liberal. Not as cold as you think."

[K]

The yield on the Canada 30-year real return bond is 73 bps as of right now. Anyway you divide that between population growth and productivity, it's just grim. I worry more for my kids than I do for my retirement. My only reassurance is knowing how badly the market can screw up sometimes.

Regarding Stephen's post: read the comments. Stephen eyeballed the curve and concluded that immigration wasn't enough. But if you do the back of the envelope math, as I did in this comment and this one we are very close to the immigration rate required to maintain the current shape of the population pyramid.

Mike: "Unless, of course, Perry wins in '12 and we get a raft of Democrats immigrating to Canada."

Friends told me that they'd be coming to live in my basement in 2000 and again in 2004. They are still living in the US. If Dubya didn't do it, I don't see why Perry will. But I'm hoping with you! (Assuming you are hoping)

[Tom Rorke]

Currently a million and a half unemployed in Canada. More workers available if you include underemployment. More again if aboriginals were fully accounted for. The demographic shift may be the only thing that can possibly save us. If the gap is going to be 200k a year, it will take at least a decade to close. I remember a time when it was thought that full employment would be a good thing, and make for a prosperous economy

[Geoff NoNick]

So if I "deal with it" by engaging in tax/CPP contribution evasion, or by moving to another country with less of a looming demographic burden, would you consider that an economically sound and legitimate way of my dealing with having been screwed by demographic history?

[K]

What the hell happened to us???  Anybody remember the collapse of the wall, the end of the cold war? The unbounded promise of Moore's law, internet efficiency, markets in everything? A few false starts (dot bomb, enron, some stupid mortgage bonds, some global trade and monetary disequilibrium) and now it's gloom from here to infinity. Every great promise now deeply soiled by the rent seeking parasites and our clientelist political overlords. (Here's looking at you Tim Geithner). Thanks to Obama, we can all now be thoroughly cynical even about "hope" itself. Makes me want to puke.

"Wake up!!! ... Wake up!!! ... Wake up!!!"
-Zach de la Rocha

[Joseph]

"mmigrants to Canada usually come from countries with far lower personal income tax rates than Canada has at present. With far less by way of government programs for the elderly than Canada has. With (sometimes) corrupt and/or totalitarian and/or dysfunctional governments. It seems a bit of a stretch to think that people who come from such countries are suddenly going to be just perfectly o.k. with paying an effective marginal tax rate of 30 or 40 or 50 percent. For programs that don't benefit them or their parents now, and don't necessarily fit with their values."

I think that this may be slightly too pessimistic.

1) Immigrants who come to Canada are deciding to come and so there is likely a selection effect for liking the Canadian system

2) Immigrants don't vote immediately (landed immigrant to citizen takes time) and some degree of assimilation to Canadian cultural values may happen

3) Immigrants may support these programs because they would like to be eventual beneficiaries

Now, I completely agree that the odds are that the programs will become less generous with time as a simple matter of reality. But there is a key difference between "less generous" and "dire poverty". Less resources per person may still leave people able to exist at an acceptable level. That we cover health care costs (a major source of unexpected large expenses) does not hurt, either.

That being said, insane ideas like making RRSP withdrawals tax free could do some damage to this social compact (benefiting wealthy retirees at the cost of low income retirees). I don't have a good way to rule out that unfortunate equilibrium.

[Patrick]

K: I think it's ageing. In aggregate, old(er) people are not hopeful or optimistic. They are more conservative (in a general, not necessarily political sense). They resist change. They fear loosing whatever status/assets/power they already have. And no wonder when one is staring down the barrel of marginal product tending to zero, an ever increasing risk of debilitating health problems, etc. If we want to ease the fear, and get older people to work longer and spend more, it's going to take a more credible and generous safety net. As it is, nobody believes that the existing system will keep them safe from winding-up living in a hovel eating cat food. The only possible response for an individual is to hoard and that is what is clobbering the US and European economies right now.

If the fear is getting bad in Canada, I can't imagine the stark terror that must permeate American society. And scared people do crazy sh*t. Look at the insanity that took hold post 9/11. Look at Rick Perry threatening the Fed Chairman - and they play on the same team! When great nations loose their marbles, terrible things happen. Keynes warned us in 1919, and his words where prophetic and the consequences terrible. My fear is that the US is heading towards a self-imposed Treaty of Versailles, and I worry whether they will be delivered from it by a future Abe Lincoln, or by a very different sort of charismatic leader.

[Andrew F]

If we're counting on technological change the save us through productivity enhancements, does that not assume that none of that improvement in standard of living would be captured by the large, diligently-voting retired class?

[Leo]

"Unless, of course, Perry wins in '12 and we get a raft of Democrats immigrating to Canada."

Interpreting this more seriously than intended, this can't happen. We don't have an immigration fast-track for Americans. They have to fit under the same skills system and maximum yearly immigration quota as everyone else in the world.

I'm wondering why we don't have a fast-track for Yanks. Is it just the bad experience we had with head taxes and discrimination in the past?

[Frances Woolley]

Leo - I think that NAFTA visas make it relatively easy for Americans to work in Canada.

Geoff NoNick - as an economist, yes, I would expect people to change their behaviour in response to incentives. And we (by which I mean people who are living in aging societies) have to deal with those responses - there's no point in getting angry or denying reality.

Joseph "I find this slightly too pessimistic" I'm always happy to be wrong. But I wonder how much the average immigrant knows about Canada's tax system upon arrival. I would be willing to bet - very little.

K - Just click on Nick's posts instead, he's usually more upbeat than I am.

[Determinant]

Frances:

People have been downbeat about immigrants not integrating and not learning how Canada works for 150 years. Back then it was the Irish.

As Joseph said the Permanent Resident period acclimates people. Plus Canada's tax system is known to all and sundry, especially through the internet.

People learn how the country works by basic research for themselves. These people left their own country for a reason. I have worked with people in that category. First, they are grateful that getting government to do something doesn't require a retail bribe. Second, they know how the country operates, they can't change and don't want to. That's why they came here.

[Jim Rootham]

You missed an option. Given that the excess retirees is at temporary (if fairly extended) some of the slack can be taken up by borrowing. One could think of this as pushing the accumulate assets strategy into the future.

This analysis needs real numbers attached to it, this is a quantitative problem not a qualitative one.

[W. Peden]

This is very tangentally related: we've been talking a bit about capital and labour, and in an ageing society one not only has demographically different groups but also groups with different roles as factors of production. So the retirees, if they have saved, are suppliers of capital and the young (particularly the very young) are labourers earning wages.

Determinant drew my attention again to the capital gain versus wage split. I'm a free market kind of guy. I don't like government redistribution. But I also want to live in an aspirational society where earning wages is attractive and where it can lead to improvements in everyone's standard of living. Since the poor tend to be wage earners rather than investors (and almost never net investors) the split that has emerged in many countries between capital gains and wages is disturbing.

To go back to supply & demand: imagine an increasingly consumerist society where there is increasing consumption and ample labour, but scarcer investment. Let's add the assumption that the tax system encourages consumption (or at the very least primarily taxes income rather than consumption) which is driving this scarcity of capital. So, if labour is no more scarce and capital is more scarce, then capital is more valuable as a factor of production. Consequentely, the "price" of capital (its dividend) rises. Therefore the society has ended up with a new split of profits between capital and labour. The negative effects are obvious: imbalancing of investment and consumption; greater inequality that is unrelated to differential productivity; and, interestingly, it makes it harder for banks to raise capital.

Now, imagine the process in reverse: a tax system that encourages investment over consumption (I hear that Scandinavian countries and Singapore fit this model). A progressive consumption tax (a progressive income tax less investments) is the simplest example (a basically flat consumption tax like VAT defeats the egalitarian point). Such a tax regime increases the share of capital to wages, which reduces the scarcity of capital and therefore increases labour's share of profits.

As a matter of political economy, I don't think we'll ever see long-lasting free market economies unless the vast majority of the population visibly gains from their operation. The upward trend in pensioners and shareholders generally has helped consolidate the market to some degree, but a society where profits are connected closely to everyone's wages is a society that has more reason welcome globalisation, deregulation and less corporate taxation. Every good neoliberal should be worried about the labour/capital split.

Now: thank for those that have read this far. Where did I go wrong in my reasoning?

[Frances Woolley]

Jim: "This analysis needs real numbers attached to it, this is a quantitative problem not a qualitative one."

Chris Ragan has just emailed me a paper that he's done for the CD Howe institute that does put numbers on this. It should be published in the next few weeks, if not sooner.

You only need the real numbers to figure out how much productivity has to increase - the qualitative analysis makes it pretty clear that this is the only answer that doesn't involve a major reduction in standard of living for some group in the future.

I do think, though, that it is very important to actually set out these options, and to make clear the vital difference between burying gold in the back garden and investing in productive capital. And, to be quite honest with you, I don't think anyone knows the extent to which you or I putting $100,000 in an exchange traded equity fund actually increases investments in productive capital.

W. Peden - you didn't go wrong. There is an absolutely wonderful graphic that the NY Times did on this on Sept 4th, if you can access the NY Times let me know and I'll link to it. Basically prior to 1970, wages rose with productivity. Since 1970, US productivity has continued to rise, but the wages of the typical worker have stagnated. This is absolutely key to so much of what's happening.

[W. Peden]

Frances Woolley,

I may be right on the phenomena, but wrong on the explanation. There might be causes of the wages/profits imbalance other than the shortage of capital-to-production.

(I'm deliberately focusing on the split, because you can argue that in many countries- including the US- wages haven't actually stagnated much, but they have certainly fallen as a percentage of net productivity.)

One way to test my theory would be to look at economies with higher savings rates and see if they have, ceteris paribus, had the same phenomena. That would falsify what I'm saying. Offhand, I can think of some supporting evidence (I'm pretty sure that savings rates were higher in the US in the 1960s, for instance) but it's so easy to think of evidence that confirms one's theory!

[Stephen Gordon]

Frances, W. Peden: I have a series of posts on the disconnect between real wages and productivity; I think the latest is here. There's actually a pretty simple explanation.

[W. Peden]

Stephen Gordon,

Fascinating stuff. So, does the relative scarcity of capital matter at all?

[Determinant]

Frances:

OK, the next step is to throw out out the assumption that workers get paid the marginal product of labour. It isn't true empirically and you just cited evidence for that.

Partly it is a power imbalance, employers have the money and the power to offer, accept and terminate employment. In a world of union-bargained contracts assuming that wages will trend to the marginal product of labour is more reasonable because unions make up for the power imbalance. But individual employment is far more a case of "take my pay offer or you won't get the job." Individuals can't get over the power imbalance and in the presence of sustained unemployment this fact is only reinforced.

That's just a first crack and really if you have a grad student who wants a project then please set them on it. It really needs that depth of study and it really is that important.

[K]

Thanks for the pep talk, Patrick! Needless to say, I totally agree.

Frances:

I don't want to feel better. I just want somebody to fix it!

And I'm with Determinant on wages. Don't we get paid the marginal cost of supplying our labour? (what's the cost of rice and shelter in china?)

[Frances Woolley]

K: "Don't we get paid the marginal cost of supplying our labour? (what's the cost of rice and shelter in china?)"

Mainstream econ will tell you that in competitive labour markets workers are paid the marginal product of their labour because firms will hire workers, bidding up wage rates, until the marginal cost of a worker is just equal to the value of what he or she produces.

Now you could say - labour markets are monopsonies, so firms drive wages down to the point when wages=marginal disutility of working for marginal worker. But the idea that wages are driven down to subsistence isn't something you'll find in most economics texts.

Which isn't to say that there's not something to that idea...

[statistics_challenged]

Anybody want to trade their gold for a few trophies from promotional products Canada? You guys have me so scared that I think I had better be buying and burying gold. Of course, when you're elderly you could easily forget where that gold is buried and that could be a real problem too.

*sigh* I'm already too old (whine, whimper)

[Jacques René Giguère]

Determinant, k and Frances:
In a world where a lot a wage-earners are in fact paid for a return on their embodied human capital and have few opportunities to retrain fast at the same level ( how long does it take for a quantum physicist to become a neurobiologist?), any departure from full employment will lead you into a world of empty Samuelson core marginal cost of surviving wage level.
In the '90,s at the time of the Soviet Union collapse, I was involved in a telecom start-up. We had a project in Eastern Europe.You could get an engineer for next to nothing. So much so that a joke was making the round of recruiting circles. It is unprintable in a fine family blog but the dark gallows humor reflected the situation of the times.

[Wonks Anonymous]

Bryan Caplan says that historically it is the old who supported the young. As they became less productive, they consumed less. They also died earlier than they do now:
http://econlog.econlib.org/archives/2009/10/was_having_kids.html

[K]

Frances: "labour markets are monopsonies"

I was more thinking of a long run Malthusian catastrophe. As long as there is high growth there is a disequilibrium short run demand for skilled labour. But as long as wages exceed subsistence (labour rents) the supply of humans will grow until we reach the long run marginal price=marginal cost equilibrium. Now that we appear to be essentially out productivity growth (or so the RR bonds would have us believe) we should be able to get to that equilibrium shortly.

[Wendy Waters]

First, I wanted to say how much I enjoyed this discussion. It kept me occupied on two skytrain rides and in a starbucks line today. Thanks all.

Second, I've been trying to think about what it all means for commercial office space demand--and perhaps what office space demand tells us about the meaning of the demographic statistics. One current observation is that employers are far more focused on making their talent more productive. Better air, light, and locations are sought after, in part, to bring out the best in people--and attract and retain the best people. So, the productivity needed to help solve the demographic crunch may be coming if you believe the office space demand tea leaves.

[reason]

"Kinship breaks down. China is a case in point. Think about the caregiving responsibilities of a Chinese woman born under the one child policy. She must look after her own parents if they become sick or infirm (who else will?). If she marries, she is also expected to look after her mother- and father-in-law. Plus she must care for her husband, and any children they have."

Huh? Don't you live in the West and are part of the same generation that I am. We may have proportionally more parents to look after but
1. they are richer and can pay other people to help.
2. we have fewer children and grandchildren to look after.

[reason]

Besides which, I think when the demographics really pinch - we will return to 60s rates of unemployment and productivity growth. Not a bad thing at all, in my view.

[Frances Woolley]

reason: "Besides which, I think when the demographics really pinch - we will return to 60s rates of unemployment and productivity growth. Not a bad thing at all, in my view."

But not 1960s levels of poverty rates for the elderly?

The point about kinship was a general one, about the impossibility of substituting "family responsibility" for other systems, that any system faces stress.

Wendy, thanks for those comments. I don't know much about office space demand - in Ottawa it's largely driven by the federal government, and many of the buildings are getting a bit older (not that a royal portrait can't give them a quick and much needed facelift ;-) )

[Determinant]

Frances:

Point of pedantry: NAFTA only applies to professionals. The agreement did not create anything like Europe's free movement of labour policy.

A NAFTA work visa (Category TN) in Canada can only be for temporary work, it must be for one of the 63 designated occupations listed here: http://www.canadaworkvisa.ca/info/nafta1.php and you cannot be self-employed. You must also have an offer in hand before you apply for the visa.

This is not a free lunch and it is very narrow. Hence why they are not commonly seen.

[JCD]

"the wages of younger workers will get bid up - again, it's impossible to escape demographics"

I really enjoy the thoughtful and well-reasoned posts on this blog. However, I find this post, and reasoning, an interesting contrast to futurist concerns regarding technological change and increased global competition undermining the value of labor.

Personally, I am not so sure that the demographics of a decreasing young labor force is going to even come close to offsetting the diminishing need for labor caused by technological progress. Obviously, however, this viewpoint has a Western slant. Although I can't foresee a scenario where the median income in developed countries begins to take off, I can easily imagine significant gains in median income worldwide (although it seems likely these will be paired with stagnant or decreasing median income in the developed world).

[Frances Woolley]

JCD "Personally, I am not so sure that the demographics of a decreasing young labor force is going to even come close to offsetting the diminishing need for labor caused by technological progress."

Thanks for your comments. Do you remember Nick's old post "Of horses and men"? If not, you must, it addresses exactly this point.

[Elizabeth]

I'm one of the young ones who is supposed to be supporting the old. The problem is, I am struggling to find any work at all. (Despite a science degree and a lot of hard work) Opportunities for young people today are not as good as for the baby boomers, which makes it very hard for us to support an aging population.

It is also frustrating when I see that I'm supposed to be saving for my future and I can't because I don't have money coming in. I try not to think too hard about when I'm old because until I find work there isn't a thing I can do about it.

[Jacques René Giguère]

Elizabeth: the first boomers ( born from 1946 to 1954) had it good but those who really made out like bandits were the lucky few born during the 30's. Few in number and just the right age to catch the Golden Thirties 45-75 . My parent's generation. See details in my older posts...
I strongly empathise with you. In part because I fear for my retirement plan...