by David S. Waddell
You may recall from your freshman economics class that GDP = C + I + G + NE. Translation: A nation’s economic output equals consumption + capital investment + government spending + exports – imports. To grow an economy you must grow consumption, capital investment, government spending, and net exports in some proportion. However, when assessing a nation’s growth capability this equation overcomplicates things. More simply, we can combine a nation’s labor force growth rate with the productivity growth rate of that labor force. Therefore, to project a nation’s GDP path we only need some demographic data and some productivity projections.
First, let’s try this at home.
The U.S. labor force has grown historically between 1-1.5 percent per year, amassing 160 million workers today. Over the last 60 years the Baby Boomer generation has had profound influence over our nation’s labor force growth rate. In the 1970s, the work migration of the Baby Boomers added 3 percent annually to the labor force, substantially boosting non-inflation adjusted GDP. Unfortunately, with the Baby Boomers now retiring, this demographic trend has reversed. According to the Bureau of Labor Statistics, the U.S. labor force grew just 1 percent annually over the last decade and will drop to half that rate over the next decade.
Worker productivity in this country has increased about 1.5 percent annually over time. The U.S. enjoyed a big productivity boom after World War II as the only factory left standing and during the late 1990s with mass adoption of new technologies. Unfortunately, since then, productivity growth has fallen sharply, growing less than 1 percent annually over the last decade. The combination of a slow-growing work force and slow productivity growth accounts for the slowing economic growth trend in the U.S. Over the next decade, a .5 percent workforce growth rate and a 1 percent productivity growth rate amounts to a projected GDP 1.5 percent growth rate overall — half of what we are used to historically.
While the U.S. may no longer have the Boomer “demographic dividend,” other nations like South Korea, Germany, Italy, Japan, Russia, and China possess shrinking workforces. In fact, globally, the labor force growth rate has declined significantly over the last few decades leading some to forecast that we could see “peak labor” within the next 50 years. With demographic trends slowing, the planet must nurture a productivity boom to replicate growth rates of yore. According to a McKinsey Institute study, historical productivity growth rates need to accelerate by 22 percent to overcome the upcoming labor undertow.
How do we do that?
1) We must help the emerging economies “catch up” with developed economy productivity rates by boosting access and competitiveness. 2) We must promote and subsidize higher R&D spending and new business formation worldwide. 3) We must improve job training and labor force participation rates among disenfranchised groups. 4) We must open up economies, reduce trade frictions, rationalize regulations, and optimize tax structures.
Notice something? Current political will seems to run counter to these directives.
Sadly, while global GDP growth over the last few decades may have been a demographic given, moving forward economic growth will become productivity, and therefore policy, dependent. Vote accordingly.
David S. Waddell is CEO of Waddell and Associates. He has appeared in The Wall Street Journal, Forbes, and
Business Week, as well as other local, national, and global resources. Visit waddellandassociates.com
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