Workforce and advanced economy GDP
When investors think about GDP growth, their thoughts automatically go to the Keynesian framework they learned in school–GDP is a function of consumption + investment + government spending + net exports. In assessing a country’s overall prospects, however, I’ve found it more useful to consider GDP growth from a labor point of view. This method is especially pertinent in developed economies, where the combination of large accumulated wealth and low birth rates make labor the scarce factor of production.
A simple idea
The idea is very simple. Real GDP is the total of a country’s output. That means it’s the product of the number of workers times average output per worker (productivity). Any increase in GDP requires some combination of having more people working or a rise in output per worker (i.e., productivity gains).
An increase in the number of workers can happen in several ways:
–increased participation in the labor force by the working-age population (ages 16-65). In recent history this has come principally from higher female workforce participation.
–having more people leaving school and entering the workforce than are retiring and exiting the workforce.
–net migration of workers into the country.
Note that, contrary to what many bosses may feel, increased productivity does not come from people putting more effort into their jobs, but from investment in new technologies and in labor-enhancing machinery–from shovels to computers.
Take the US, for example. Over the last 15 years or so (not including the current recession), real GDP has averaged about 3.2% growth per year.
Of that, 1.9% comes from productivity increase and 1.3% from workforce growth.
In workforce growth, the primary factors have been:
increased female participation,
immigration (about 15% of the US workforce is foreign-born) and
growth in the US-born population.
These factors probably produced .2%, .3% and .8% of total workforce growth.
Let’s put these factors to work. Assume that female participation in the workforce stays about where it is, and that, as the Census Bureau projects, net immigration adds .2% in the future. Then, even before considering the slowdown to workforce growth caused by the Baby Boom retiring, the labor force stands to grow by only about 1% per year. This would seem to imply that US real GDP growth certainly won’t be higher over the next ten years than it has been in the past, and that it could easily trend .5% lower. So, more than ever before, the case for US growth must be based on productivity.
Let’s look at Japan for moment. That country has the oldest population in the industrialized world. It is not particularly welcoming to foreign workers or to female participation in the workplace in high value-added jobs. Its labor productivity is somewhat below the level of the US. The labor force peaked at about 65 million on 1997 and has been falling by about .2% yearly since then. So Japan needs to generate productivity growth just to keep the economy from shrinking!
If we figure, to make up a number, that Japanese productivity adds 1.5% to GDP growth, then real GDP would appear to be capped at about 1.3%. From this, I’d conclude that the best investment case for a Japanese company would be based on a niche focus, its non-Japanese operations or on its role in generating productivity growth.
It’s possible that the US could have higher GDP than one might otherwise think, since we have periods where large numbers of undocumented foreigners (not captured in official statistics) are employed here. But there’s no chance of that for Japan. So we should probably think of the US GDP number as a reasonable possibility but the Japanese one as an aspiration or an absolute ceiling.
Emerging markets? …not a strong connection
What about emerging markets, which typically have excess labor? Workforce demographics don’t give the same information leverage as in advanced economies. Still, there are some important things to say. ( Two information-related issues: emerging economies can have large informal (off the books) economies; government statistics can also be more expressive of government desires than of the real situation.)
In fast-growing countries with large, young populations, the main issue may be providing enough jobs for new workers entering the labor force for the first time. If the government doesn’t do that, social unrest (think Tiananmen Square) may result.
The Middle East
Take the Middle East as an example. The median age in Saudi Arabia is about 22 (vs 36 in the US and 43 in Japan). In Iran, it’s 27; in Iraq it’s 20. Population growth is under 1% per year in Iran but over 2% in the others. Where are the jobs going to come from to provide meaningful lives for a young population, with large numbers of new job seekers entering the market each year? No wonder this area is a hotbed of unrest.
The median age in mainland China is 35, about the same as in the US. But just under half the population works in agriculture. And the country is still dealing with a legacy of make-work jobs in bloated, unprofitable state-owned enterprises.
China will produce about 5.5 million university graduates this year. Millions more will leave farms this year to find work in the cities, and state-owned enterprises continue to lay off hundreds of thousands of workers. China feels its industrial policy has to be shaped with a view to providing jobs to absorb this mammoth number of job seekers.