Kai Pfaffenbach / REUTERS Gone gray: a nursing home in Hanover, Germany, January 2013.

The Demographics of Stagnation

Why People Matter for Economic Growth

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In every single region of the world, economic growth has failed to return to the rate it averaged before the Great Recession. Economists have come up with a variety of theories for why this recovery has been the weakest in postwar history, including high indebtedness, growing income inequality, and excess caution induced by the original debt crisis. Although each explanation has some merit, experts have largely overlooked what may be the most important factor: the global slowdown in the growth of the labor force.

One way to calculate the world’s potential growth rate is to add the rate at which the labor force is expanding to the rate at which productivity is rising. Since 1960, gains in both factors have contributed equally to potential economic growth. And in the last decade, the gains in both appear to have leveled off. The difference between these two drivers, however, is that there is a debate about whether the decline in productivity growth is real. Productivity measurements have arguably failed to capture savings in money and time generated by new technologies, from superfast Internet connections to artificial intelligence. But it is hard to deny that the growth in the size of the labor force—which is driven mainly by increases in the number of working-age people, those between the ages of 15 and 64—has slowed across the world.

In a world with fewer young people, economic growth will be harder to come by.

Between 1960 and 2005, the global labor force grew at an average of 1.8 percent per year, but since 2005, the rate has downshifted to just 1.1 percent, and it will likely slip further in the coming decades as fertility rates continue to decline in most parts of the world. The labor force is still growing rapidly in Nigeria, the Philippines, and a few other countries. But it is growing very slowly in the United States—at 0.5 percent per year over the past decade, compared with 1.7 percent from 1960 to 2005—and is already shrinking in some countries, such

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