Academic Literature

Changes in the age structure of the workforce are significantly correlated with changes in aggregate productivity

This paper examines the relationship between workforce demographics and aggregate productivity. Changes in the age structure of the workforce is found to be significantly correlated with changes in aggregate productivity. Different demographic structures may be related to almost one quarter of the persistent productivity gap between the OECD and low income nations as well as part of the productivity divergence between 1960 and 1990.

The link between demographics and productivity growth can also provide insight into cross country productivity patterns. The demographic characteristics of the workforce differ greatly across countries with different income levels. Figure 2 illustrates the proportion of the workforce between the ages of 40 and 49 by income level.
Two facts are immediately apparent. The poorer nations have a lower proportion of forty year old workers than the richer nations in every year. This is associated with lower productivity in the poor nations throughout the sample. The second aspect of the graph is the trend. The wealthy nations saw a relatively static 40 year old cohort until about 1980. From 1980 until 2000 the proportion of 40 year olds increases dramatically. This is not true of the poor nations.

There are two implications. First, some proportion of the persistent productivity gap between rich and poor nations is associated with the persistent differences in the age structures. Second, the changes over time may be associated with the observed productivity divergence between the rich and poor nations.

The results suggest that a significant portion of the productivity gap between rich and poor countries is related to different demographic structures. The results also appear to capture some of the productivity divergence between the poor and rich countries since 1980. Given the importance of productivity in explaining cross country income differences, this is a useful result. Unlike most of the variables used in the growth literature to study productivity, demographics have substantial time series variation.

While emphasizing the importance of demographics, this paper is agnostic as to the mechanisms through which demographic change and productivity are related. However, unlike many factors studied in the growth literature, contemporaneous reverse causality is not driving the results. The regressions using lagged demographics indicate that movements in productivity are not causing contemporaneous changes in demographics. This is not to say that the reverse is necessarily true. The evidence in this paper is not sufficient to establish a causal link between demographic change and productivity growth. An alternative possibility is that there is some omitted factor which had an impact on fertility in the past but which affects productivity with long lags.
Understanding this relationship is important because of the useful and predictable characteristics of demographics and because the significance of the relationship is strong. Almost every region in the world is experiencing significant demographic change. The rich nations are rapidly becoming older and most have birthrates below replacement level. Some poor countries are experiencing dramatically reduced birthrates in the wake of population explosions. Understanding how these changes will affect productivity over the coming decades is of crucial importance. While this paper shows that there is a relationship between productivity and demographics, more research is needed to understand the mechanisms behind this relationship.

Chosen excerpts by Job Market Monitor. Read the whole story at  Demographics and Productivity

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