{"id":106,"date":"2023-02-28T08:46:00","date_gmt":"2023-02-28T07:46:00","guid":{"rendered":"https:\/\/www.theftexplained.com\/?p=106"},"modified":"2023-02-27T16:07:15","modified_gmt":"2023-02-27T15:07:15","slug":"avoiding-the-heart-attack","status":"publish","type":"post","link":"https:\/\/www.theFTexplained.com\/index.php\/2023\/02\/28\/avoiding-the-heart-attack\/","title":{"rendered":"Avoiding the heart attack"},"content":{"rendered":"\n

Although this blog is relatively recent, keen readers since Day 1 may being to understand that the link between economy and demography is features fairly high in my list of interests. Indeed, as expressed a few weeks ago<\/a>, I believe the changing paradigm will force company executives and policymakers to adapt themselves to an unprecedented extent. If they fail to adapt sufficiently, I fear our societies face the risk of an ‘economic heart attack’.<\/p>\n\n\n\n

To simplify, when it comes to labour activity, all individuals within a country can be classified according to 3 categories – those looking for a more rigorous classification can refer themselves to the US Bureau of Labor of Statistics<\/em><\/a>, for instance:<\/p>\n\n\n\n

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  1. ‘Active’<\/strong> individuals are those performing paid work, i.e. receiving monetary compensation in exchange for their contribution to the production of goods and\/or services;<\/li>\n\n\n\n
  2. ‘Unemployed’<\/strong> individuals are those seeking to perform paid work, but unable to do so – this block in particular tends to be divided in a very wide array of situations, which I will not discuss here;<\/li>\n\n\n\n
  3. ‘Inactive’<\/strong> individuals are all individuals not fitting in the first 2 categories. You would find pensioners, students, schoolboys and schoolgirls, stay-at-home parents (hence the terminology ‘inactive’ can be misleading!), disabled people unable to work etc.<\/li>\n<\/ol>\n\n\n\n

    To give some graphic perspective, I have used the US as an example, overlaying the labor force participation rate<\/span> (i.e. the share of employed and unemployed within the entire population) and the employment rate<\/span> (i.e. the share of employed within the employed and unemployed population) by age and gender on top of the 2023 age pyramid. Due to data limitations, I cannot pretend that the build is perfect (e.g. I could not find the labor participation rate for 2022, only for 2021), but I think it gives us a good enough ballpark view.<\/p>\n\n\n

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    2023 US Age Pyramid by employment status (approximate)
    Sources: United Census Bureau, U.S. Bureau of Labor Statistics<\/em>, own computations<\/em><\/figcaption><\/figure>\n<\/div>\n\n\n

    To repeat the heart analogy expressed in the title, if we consider the United States as a completely autonomous economic zone (which is obviously far from being the case), the orange zone “irrigates” the whole economic body. If the orange zone becomes relatively too narrow, the body is not irrigated enough, i.e. not enough goods and services are produced to satisfy the demand, leading to inflation and\/or the need to fill the gap with imports, leading to a trade imbalance (which is ultimately also inflationary). So keeping the heart strong and dynamic is a key objective of any economic policy.<\/p>\n\n\n\n

    We could add to this age pyramid a dimension of depth, comparable to the quantity of “blood” that each active individual is able to inject; in economics, we speak of productivity.<\/p>\n\n\n\n

    In that context, when looking at this chart, the reader may be surprised that newspapers almost exclusively focus<\/a> on the evolution of the unemployment rate (the blue area) to assess the health of the economy, whereas this phenomenon only represents the edge of the heart – I do not want to undermine the social importance of the issue though, bringing unemployed people back in the workforce should be a priority for any government. Today, we tend to celebrate that unemployment is at almost all-time lows in many areas of the globe. Are these cries of joy justified? Not necessarily, unfortunately.<\/p>\n\n\n\n

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    Historical evolution of US employment since 1973. Source: St Louis Federal Reserve.<\/em><\/figcaption><\/figure>\n\n\n\n

    When looking at the bigger picture, we see that the labor participation rate (the share of orange + blue) peaked around the year 2000 and has been on the decline since, which can be explained by an aging population and longer studies. However, more worryingly, looking at the recent times, the labor participation rate has not recovered from its pre-COVID level (by about a percentage point). To go back to our chart, this means that, since 2020, the grey area has eaten approximately 3m individuals from the red and blue areas – not insignificant.<\/p>\n\n\n\n

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    Historical evolution of US Labor Participation rate since 1973. Source : St Louis FED.<\/em><\/figcaption><\/figure>\n\n\n\n

    How do we offset the trend and ‘make the heart great again’? In theory (you will see what I mean by ‘theory’ shortly), there are a few ways to increase the share of orange:<\/p>\n\n\n\n