Working Age Population Demographics: The one place where the US is okay?

One aspect of demographics that is often overlooked is the change in the working age population, the population between the ages of 20 and 65.

Source: UN Medium Variant Projections, World Population Prospects: The 2008 Revision

 

In the above graph, the US looks like it is pretty well situated compared to Japan and Western Europe. Japan’s economy, in addition to its other problems, needs to overcome one percent of shrinkage in its work force each year. Incidentally, this means that the nominal 3% GDP target recently announced by the government is in reality more of a 4% nominal GDP per worker target.  Australia, New Zealand and Canada (Not pictured) are in pretty good positions, with their steady immigration policies preventing their working age population from shrinking.

 

The United States looks like Canada and New Zealand, but the composition of workers is quite different. Australia and Canada’s immigration laws encourage educated immigrants. In the United States, the most fecund populations and the largest share of immigrants are not educated, but are instead composed largely of illegal immigrants who are periodically granted amnesty or their children who are natural born citizens.  Data from the US Census shows that the earnings gap per person is currently relatively significant:

 

Race

Total Money Income in 2008 (Mean)

White, Nonhispanic

41,414

Black Alone

29,264

Hispanic Alone

27,892

Asian Alone

44,593

 

The Census’s constant migration model of the US population shows that white non-Hispanic working age group is actually shrinking:

 

   

 

Assuming that the wage differential between ethnic groups does not shrink to a negligible size, this adds up to a working age demographic picture that isn’t quite as rosy for the United States when compared with Canada and Australia. Even so, it is still in better position than Europe and Japan who will have have to run the red queen's race to keep their economy the same size.

Introductory Post

The goal of this blog is to focus on long term problems while avoiding the pessimistic bias by recognizing the positive impact of human ingenuity compounding over long time periods

I’ve free ridden off of some of the very insightful analysis of the blogosphere for some time. This blog is my attempt to get some of my ideas out there and free ride off of the insightful commenters.

Below are a few of the themes that I think are important:

1. The time preference of the average person and average policy maker

There is a problem with the excessive focus on the short term. The existence of this focus is well documented in behavioral economic studies of hyperbolic discounting.  Policies that have tradeoffs with benefits in the short term vs. large expenses in the long term are often favored.  To take one example, the current state and local pension problems occurring all around the United States exist in part because the time preferences of politicians are far too short term.  Further more, demographic pressures mean that Keynes’s famous quote “The long run is a misleading guide to current affairs. In the long run we are all dead.” is changing to “In the medium run we are all dead” for more and more voters as the population of the developed world ages.

2. Globalization and its impact on the middle class of the developed world

Globalization is unequivocally increasing the wealth of this world. Basic comparative advantage proves that when trade is opened up, the pie grows. However, the inefficient producers of goods produced by new trading partners do often lose out. In this day and age, those inefficient producers tend to consist largely of the middle class of the developed world. The upper class has capital that is benefiting from globalization while the lower class has service jobs with manual labor that can’t be replicated by someone working for much cheaper when they are halfway across the globe.  The interesting question is whether the benefits of cheaper goods outweigh the costs of slightly worse jobs for the middle class.  Even with globalization, total compensation has been trending upwards for labor, people just don’t notice it because a lot of compensation goes towards labor costs and many simplistic commentators like showing the inflation adjusted household median income chart that leaves out noncash forms of compensation.  

Source: US Census and BLS

The other question is whether there is any policy that could have prevented these harms to the middle class short of attempts to keep the developing world undeveloped.  Even if the answer to that is no, this does not mean that there will not be a counter productive political attempts to reverse recent trends.

3. Resource constraints

Peak oil is the main resource constraint that comes to mind, but there are many long term issues with resources that are not being adequately addressed. Peak oil generally raises the cost of substitutable goods, making other forms of energy more expensive. This bleeds into other assets such as raising the cost aluminum, which is produced in an energy intensive fashion.  Water constraints are another important resource limitation on growth.  Other resources like rare earth elements or industrial metals may be more expensive due to short term supply and demand imbalances driven in part by the developing world. What makes peak oil more interesting than other basic resource problems is that the daily oil supply is running up against geologic constraints while other resource shortages generally last only as long as it takes for new mines to be built and brought online.

4. The entitlement mindset

A lot of people feel like they are owed a lot of things by society. They also believe that the average person shouldn’t be paying for these things. This is a trend that cannot continue.  Also relevant to this theme is the long term performance of countries with lots of foreign aid compared to countries that are less dependent on foreign aid.

5. Status driven trends

As the developed world gets richer, more and more money is spent on status and signaling related behavior. This has many unfortunate side effects.

6. Demographic issues

Source: UN Medium Variant Projections: The 2008 Revision

Charts like the one above are very common when discussing upcoming demographic problems.  The developed world is aging, and long term demographic trends are important beyond the basic “How are we going to pay for all of these old people?” questions.