Photo Credit: Lending Memo
Four National and Global Economic Trends That Will Mark This Century
Labor Force Participation is Declining
As of January 2016, US unemployment stood at just 4.9%. But part of this decline in unemployment is from a coinciding decline in labor force participation. As Americans later in their careers found it hard to find work after the Great Recession, many left the labor force entirely. Baby-boomers taking early or planned upon retirement could also help explain this drop in labor force participation. Regardless, while only 5% of Americans may be unemployed, 37.4% of Americans are not looking for jobs at all. In November 2006, prior to the Great Recession, this number was 33.7%. Part of this number is the natural course of workers retiring, but the larger implications for the American economy are several. The larger the share of the population not in the workforce, the greater the burden on the workforce to finance that population segment’s entitlements. This trend is mirrored globally, where 36.5% of the population was outside of the labor force by 2014.
The Population is Aging
The United States is not the only country that has to worry about an aging work force. It may come as a surprise, but globally we are facing an aging world. In 1980, only 8.5% of the world was 60 or older. By 2015, this had increased to 12.3%, and is expected to rise to 16.5% by 2030 and 21.5% by 2050. Those numbers are staggering, and suggest that in the next few decades a smaller proportion of the world will be working and supporting a larger pool of the elderly. The figures are even more shocking when focused on developed economies. There it is expected that 32.8% of the population will be 60 or older by 2050. In Japan, a nation where adult diapers sales has surpassed those of infant diapers, 42.5% of the population will be over the age of 60 by 2050.
Government Spending, as % of GDP, is Growing Globally
People have begun to expect more from their governments, globally, and as a result government spending as part of GDP has climbed. Britain is an average example of this phenomena. At the peak of the British Empire in 1870, government spending was only 9.4% of GDP. By 1920, this had climbed to 26.2%. By 1980 this figure had risen to 38.8%, and by 2009, 47.2%.[1] This is a rough average of most developed economies as well, where government spending as a percent of GDP a century ago averaged around 12%, and today stands at just under 50%. The United States Government budget, partly due to expanded entitlements and partly due to its defense budget, made up 42% of GDP for 2009. What does this mean? The American model of small government and noninterference in the nation’s economy may be a thing of the past as more and more of its economic activity is under the purview of Congress.
Labor Force’s Share of Global (and National) Income is in Decline
In Macroeconomics, the share of a nation’s income is divided between the labor force and business owners and employers (think office worker’s salary and the rent their office pays to the building owner). Traditionally, the labor force has accounted for two-thirds of a nation’s income, and capital rent as the other third. For the past fifty years, labor’s share of income has steadily declined, from around 65% in the U.S. in 1975 to just below 60%, and globally from around 57% to 53%.[2] Every percentage point in a global economy means billions of dollars. This trend has disturbing implications for global inequality. As business owners and employers see their incomes rise comparatively to the wages of the labor force, wealth inequality will grow and world wealth will become increasingly concentrated.
Conclusions:
All of these trends are interconnected. As the global population ages, labor force participation will decline and government’s expenditures on entitlements will grow. Together with these worrying developments, the labor force’s declining share of income will mean that a greater share of wealth is concentrated among a smaller share of the population, and that inequality is increasing. While the United States generally hovers around the global average of these statistics, it is revealing that the challenges that we will face are shared broadly by the global community. These current trends indicate the coming century will be one of big government, growing inequality, and a shrinking labor force to support an aging population.
[1] Sources: Vito Tanzi and Ludger Schuknecht; IMF; OECD
[2] Karabarbounis, Loukas and Brent Neiman, The Global Decline of the Labor Share. The National Bureau of Economic Research (NBER Working Paper No. 19136, June 2013)
