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The impact of lower population and labor force projections on economic forecasts
25 January 2021Joel Prakken, Ph.D.Nariman Behravesh, Ph.D.
When considering sources of uncertainty in economic forecasts,
population projections are usually not the first things that come
to mind. IHS Markit economists and other forecasters typically rely
on projections of population trends from the US Bureau of the
Census, the United Nations, and other official statistical sources.
Because historically they have been subject to slow changes,
demographic projections have been updated regularly, but not
frequently—normally every three years for the United
States.
Unfortunately, owing to a series of events and developments
during the past decade—the global financial crisis, the opioid
crisis, restrictive immigration policies, and the COVID-19
pandemic—recent population and labor force projections have
been too high. Specifically:
Assumed death rates have been too low,
Anticipated birth rates have been too high, and
Expected immigration rates have been too high.
Our population experts—using proprietary models—have
determined that, because of the adverse developments mentioned
above, population projections for 2030 are likely to be roughly
2.0% lower than previous projections. These new projections are
incorporated into the January 2021 IHS Markit baseline forecast for
the US economy.
The result of these changes will be a near-term downward
revision in total population growth and a permanent downward
revision in the level of population. Each of the underlying changes
will affect segments of the population differently—the changes
in birth rate projections will affect the young population; the
excess mortality projections will affect the middle-aged and
elderly; and the immigration assumptions will be distributed more
evenly across ages.
Demographic impacts
The changes in assumptions about death rates, fertility, and
immigration in the new IHS Markit baseline population projections
have the following demographic impacts.
Population
The level of US resident population by 2030 is projected to be
roughly 2% lower than the prior estimate. With a lower projected
fertility rate, the biggest impact (nearly 8% by 2030) will be on
the 0-15 age cohort. The impact of the lower population projections
for the young population will be reflected in the projections for
the older cohorts beyond 2030.
Households
Household formation is projected to be 0.5% lower in the new
baseline in 2021 compared with the old. It is then expected to rise
to the level of the old baseline by 2025—to a rate of about 1.2
million annually.
The dependency ratio (children as a percent of the total
population) is projected to fall faster in the new baseline (to
below 18) by 2030, compared with the old baseline (to just under
19).
Working age population and labor force
The working age population is projected to rise to around 285
million by the end of the decade—roughly 0.7% lower than the
old baseline.
The labor force participation rate is projected to continue
falling in the next decade, mostly because of the aging of the baby
boomers.
In the new baseline, the labor force rises gradually to around
168 million by 2030—roughly 2 million below the old
baseline.
Macroeconomic impacts
The January IHS Markit baseline forecast incorporates the
demographic changes detailed above, as well as new data and changes
in policy assumptions. Thus, a macroeconomic comparison of the
December and January baselines would not give an accurate estimate
of the demographic impacts alone. To provide such a "clean"
estimate would require running the old (Census 2017) and new (IHS
Markit) demographic assumptions through a small Solow-type growth
model. The results can be seen in the accompanying chart.
An interesting result of this model run is that while GDP is
down, GDP per capita is up. The main reason is that the decline in
population under the age of 16 lowers the denominator of the
GDP-to-population ratio. This upward pressure on per capita GDP is
accentuated slightly by the standard results in a Solow-type growth
model—that lower growth in the labor force slightly raises the
productivity of labor (e.g., the real wage) by making labor scarcer
relative to capital. The upward revision in the per capita GDP with
the introduction of the new population assumptions is a feature of
the IHS Markit January forecast.
Note that by 2030, GDP is down 0.40%. This accords closely with
results from the larger IHS Markit macroeconomic model.
Posted 25 January 2021 by Joel Prakken, Chief US Economist and co-head of US Economics, Research Advisory Specialty Solutions, S&P Global Market Intelligence and
RT @negocios_tv: Joel Prakken (S&P Global): “EEUU no está en #recesión todavía”
Analizamos la situación de la #economía en #EEUU tras cono…
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