TIP Strategies is a privately held Austin-based economic development consulting firm committed to providing quality solutions for public and private‑sector clients.
This blog is dedicated to exploring new data and trends in economic development.
Most economic development and workforce professionals track economic trends closely, but often we fail to examine how long-term economic trends relate to demographic changes. Connecting the dots between the two can create a context for documenting social and political changes, help explain consumption patterns and attitudes, and provide a solid foundation for strategic planning.
In addition to providing an understanding of where we are and how we got there, demographics can also give us insights about the future. Forecasting economic conditions is as much art as science; trying to predict the state of the economy a generation from now would be a thought experiment at best. Painting a picture of the demographic characteristics of that future generation, by comparison, is relatively straightforward. Once people are born, we have a pretty good concept of their life expectancies, we know the years they are most likely to be in the workforce, and we have reliable estimates of labor force participation rates. Birth rates, death rates, immigration rates, and life expectancies can change, of course, but it is a relatively slow process; they rarely change suddenly. Whether or not you agree with Peter Drucker’s description of demographics as “the future that has already happened,” paying attention to demographic trends can help inform economic development and workforce strategies.
A Seismic Shift
In 2011, the first baby boomers (defined as those born between 1946 and 1964) are turning 65 and the first wave will begin retiring. There is anecdotal evidence that the recent recession — and the massive losses many people experienced in their investment portfolios as a result — will delay retirement for some workers. However, these workers will eventually leave the labor pool and the market place. The generations that will replace them are significantly smaller, leaving a gap that will drive trends in worker availability, consumer spending levels, housing needs, and federal entitlement programs for decades to come.
This demographic shift is not just a US phenomenon. In countries across the globe, periods of large population growth – like America’s post-WWII baby boom – have been followed by periods of decline or population “busts.” For many countries, particularly those in Western Europe and Asia, these periods of population decline were driven in part by concerns about the availability and quality of natural resources. These concerns led to the passage of policies designed to encourage at- or near-zero population growth, many of which were wildly successful.
What these movements often failed to account for, however, was the imbalance such policies would create with regard to the availability of workers and the provision of social services. A look at population projections for selected countries reveals dramatic decline in the number of people of working age.
Chart: Annual Change in Working-Age Population in Selected Countries
It's a Small World...and a Big, Global Change
According to The Economist, the world in 2050 will be “more crowded, but more stable," as the global population reaches 9 billion, while the growth rate is reduced to near zero. This short video on global population growth rates considers the impact of the baby boom generation as well as changing fertility rates over time.
An Approaching Deficit of Workers?
As the baby boom generation gradually leaves the workforce over the next 20 years, a significant labor deficit has been projected for the US — a situation many developed nations are already facing. In the past 10 years, America’s working-age population grew by an average of 2.1 million annually. In the next 10 years, the average will be 1.1 million, and in the 10 years after that, fewer than 350,000 annually. These calculations do not take into account labor force participation rates (not all people of working age will ultimately enter the labor force), so the actual number of available workers is likely to be even smaller. Contrast this figure with long-term job creation trends. Since World War II, the US has added an average of 1.5 million jobs each year. This average takes into account periods of economic expansion, as well as several recessions, although none as steep as the current one.
Yet, even if we assume Americans stay in the labor force longer and if we account for the time needed to recapture the massive job losses of the past two years, we are likely to face an extended period of worker shortages in the coming decades. Furthermore, this analysis only considers the number of working-age people; it does not account for educational attainment or skill levels. As a result, shortages of high-skilled labor are likely to be even more pronounced in the years ahead. This trend can already be seen as the country faces shortages of skilled workers, while at the same time experiencing some of the highest levels of unemployment in recent memory.
Chart: The Approaching Deficit of Workers
Policymakers nationwide are responding to the talent gap in a number of different ways. However, focusing on education is undoubtedly at the top of the priority list. There is a direct connection between the education and skill levels of workers and their earning potential. The larger a region’s pool of skilled labor, the better it is positioned to compete. Strategies should focus on improving educational attainment levels, addressing the availability of workers in demand occupations, and attracting and retaining workers. Because of the global nature of this issue, competition for talent, or highly educated labor, is a trend that will have implications for economic development in the coming decades.
The Changing Face of Family
Beyond its workforce implications, demographic trends can also shed light on social changes. A 2010 study by the Pew Research Center found that the number of Americans living in multi-generational households has increased, after bottoming out around 1980.
According to the study, Americans are more likely than in the past to live in a family household that contained at least two adult generations, or a grandparent and at least one other generation. Approximately 49 million US households (16 percent of the total) fell into this category in 2008. Although an aging population might seem to be the driving factor in this trend, the Pew research found that young adults are most responsible for the growing number of multi-generational households. In 1980 only 11 percent of adults age 25 to 34 lived with another adult generation of their family. By 2008, this figure had risen to 20 percent. By contrast, the share of people age 65 years and over living in a multi-generational household has risen only slightly during this time period, from 17 percent in 1980 to 20 percent in 2008.
In addition to poor economic conditions (which have led young adults to “boomerang” back home), other factors cited in the study include a later age at first marriage (resulting in a larger pool of single twenty-somethings who are more likely than in the past to remain at home), changes in Medicare benefits (which provide incentives for recipients who are able to have their adult children serve as informal caregivers) and the influx of immigrants, particularly from Asia and Latin America (cultures where multi-generational households are more common than in the US).
The Pew research is one more example of the fact that our concept of the traditional family – a single-family house with two parents and a couple of related children – may not reflect the manner in which the majority of residents in our communities actually live. Understanding household characteristics can enhance the accuracy of housing forecasts, identify social service needs, and inform public policies.
The Great Divide
America is one of the few developed countries in which income inequality has increased in recent decades. After falling throughout much of the early part of the 20th century, the gap between those at the top and the bottom of the income scale has been increasing steadily for the last 30 years. The top one-fifth of U.S. households now control half of all the nation's income. Annual income for the top 20 percent in 2005 was 15 times that of the bottom 20 percent.
Some might argue this measure does not capture movement of individuals across income levels; people typically do not remain in the same income bracket over the course of their lifetime. However, the overall trend suggests that a large share of the nation’s population has not reaped the benefits of the remarkable economic growth that the US has experienced. Former Federal Reserve Chairman, Alan Greenspan, has described the situation in his remarks to Congress and other groups as a “very disturbing trend” and something that is “not the type of thing which a democratic society - a capitalist democratic society - can really accept without addressing.”
Chart: US Income Inequality