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Elliot Eisenberg, Ph.D.
GraphsandLaughs, LLC
May 2017
Over the past year, there has been considerable talk about GDP growth and the desire to raise it. While higher GDP growth is clearly good, getting there will be tough. Since the end of the Great Recession, the US has been averaging chronically weak GDP growth of 2.1%/year. By contrast, from late 1991 through the onset of the Great Recession in mid-2008, GDP growth averaged a reasonably robust 3.1%/year; 50% higher, a huge difference. While there are many explanations for the slowdown, the core reason comes down to three specific ways that people impact GDP growth.
Firstly, growth in the overall population generally leads to more people working, which grows the economy. Secondly, a greater share of the existing population can be employed, which also increases our economic output. And thirdly, those who are working can perform better — and that rise in worker productivity also increases GDP. Regrettably, on all these fronts, the US has been struggling.
On the population front, the news is not good. In the early 1990s, population growth was a reasonably strong 1.3%/year. While the rate generally declined over the next two decades, it was still 1%/year when the Great Recession began. By the end of the recession, however, population growth had slowed to 0.85%, and today, it’s just 0.7%/year. Worse, the Census Bureau projects population growth to be just 0.2%/year by 2026, and that assumes net immigration of 1.3 million/year through the coming decade. And, under those assumptions, GDP growth in 2026 will probably be only 1.5%/year, down from the weak 2.1% of today.
As for the percentage of the population in the labor force, it’s unfortunately declining. After peaking at 67.3% during the latter years of the Clinton administration, the civilian labor force participation rate steadily declined through the end of 2015, bottoming out at 62.4%. Since then, it has risen slightly and now stands at 63%. However, because of the damage caused by the recent financial crisis and aging of the population, it is, at best, expected to remain where it is, although a small decline is entirely possible. Were the labor force participation rate to reverse course and return to 67.3% over the next decade and a half, by 2032, about seven million extra people would be employed, and GDP growth during that 15-year period would be a quarter-of-one percent/year higher than otherwise.
As to the third concern, labor productivity growth has been poor for quite some time. Since the end of the recession, productivity gains have averaged about 0.75%/year. By contrast, between 1990 and 2007, labor productivity averaged 2.4% annually. While 1990-2007 were good years for labor productivity growth, never has there been such a long period of time with such anemic productivity growth as we are now experiencing. The closest we came is the 1973 – 1979 period when labor productivity growth averaged 1.3%/year. Since every 1% increase in productivity boosts both GDP and per capita income by an equal amount, productivity increases are particularly beneficial.
While higher GDP growth is unambiguously good, achieving it will be devilishly difficult given our poor demographics and the productivity slowdown. Solutions include increased immigration, improved vocational training, and lower marginal tax rates on both labor and capital. More immigration and lower tax rates on labor should increase the size of the labor force, while improved vocational training and lower taxes on capital can be expected to increase labor productivity. If it were up to me, all these solutions would be employed.
Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net. His daily 70 word economics and policy blog can be seen at www.econ70.com. You can subscribe to have the blog delivered directly to your email by visiting the website or by texting the word “BOWTIE” to 22828.
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