Economies face demographic drag

Employment growth around the world has been weak in the current economic cycle. While this is partly due to cyclical factors, an underlying secular trend in demographics has also been a contributing factor.

On Friday, the United States Labor Department reported that employment rose by 88,000 in March. This is weaker than in recent months but employment growth in the recovery from the last recession has been weak anyway, with employment still significantly below the last cycle peak.

One of the reasons for the weak growth in employment has been the lack of demand growth in the world economy as major banks in developed economies tightened lending standards to try to repair balance sheets stretched by excessive lending in the last economic cycle.

However, another, less-mentioned reason for the weak growth in employment is the slower growth in the labour force itself. Indeed, in some countries, the labour force is shrinking.

For example, while US employment rose by just 88,000 in March, the unemployment rate still fell to 7.6 percent from 7.7 percent in February as the labour force contracted by 496,000.

The outright decline in the US labour force in March may have been an aberration. Over the longer term, the US labour force has still been growing.

Still, the trend in the growth rate is clearly down. In the ten years from March 1983 to March 1993, the labour force grew 16.3 percent. In the ten years from March 1993 to March 2003, it grew 13.5 percent.

In the ten years from March 2003 to March 2013, the US labour force grew just 6.2 percent.

The US is not unique in seeing weak growth in its labour force. Indeed, the demographic trend looks even worse in some of the other major economies.

In an article on 27 March, Bloomberg reported that, based on data from the US Census Bureau, China’s pool of 15- to 39-year-olds fell to 525 million last year, down from 557 million five years earlier. As a result of the slowing growth in the labour force, the report, citing consulting company Hackett Group, said that the gap between manufacturing costs in the US and China has almost halved in the past eight years and will fall to 16 percent this year.

Europe has a similar demographic trend. The database from the Census Bureau shows that the number of 15- to 39-year-olds in countries belonging to the European Union fell to 161 million last year from 169 million in 2007.

As far as shrinking labour forces is concerned, though, no country has had it worse than Japan. Data from Japan's Statistics Bureau show that its labour force peaked back in 1997 and has been on a declining trend ever since.

The number of entrants into the labour force looks set to fall further in the coming years. China, Europe, Japan and even the US have fewer people below age 15 than in the 15-29 age group.

Fewer new workers means lower economic growth is likely. Demographics looks set to remain a drag on economic growth for most of the major economies for several more years.