Macro Roundup

Blackrock analysis forecasting declining American labor force participation rates driven by aging. This implies that economic activity “will need to run at a lower level to avoid persistent wage and price inflation.”, “…The participation rate, or the share of people aged 16 and over that have or are looking for work, nosedived when the pandemic hit [orange line above]. Some of that sharp decline has been made up as people return. But we don’t see it recovering further because the effects of an aging population account for most of the remaining shortfall. More people have hit 64 years old, the age at which most retire. That’s taken 1.3M out of the workforce as of October, we find. Another 630,000 left as the pandemic caused fewer people to work past retirement age and hastened retirement for people coming up to 64. That implies the workforce will keep shrinking relative to the population. Economic activity will need to run at a lower level to avoid persistent wage and price inflation, especially in the labor-heavy services sector…”

Ethan Wu, “Unions’ inflation warning?” Financial Times, December 8, 2022, https://www.ft.com/content/96a5dba9-da0b-4af9-a7cc-94636ad98698

Unions’ inflation warning?

Are unions a bellwether of sticky inflation?

We wrote on Monday about the resilience of US wage growth, which, with inflation above 7 per cent, scares investors. You hear different formulations for why (“cost-push spiral”, “wage-price persistence”), but the throughline is the same. Prices and wages are linked and once both are rising, both must be forced down together.

That’s worth thinking about, but it’s also worth appreciating that most US observers don’t suspect a 1970s-style wage-price spiral is on the cards. That is, notably, not so in the UK, where the wage-price spiral debate is very much alive. This chart probably has something to do with it:

The argument here is that the 1970s spiral depended on cost-of-living wage adjustments written into union contracts, creating a fixed relationship between wages and prices. Everyone figured out pay and prices would keep rising, and acted that way. Inflation expectations soared.

But now, US organised labour is weak, cost-of-living adjustments aren’t widespread and businesses can be more judicious about price increases.

Could that change? On the margins, it already is. From rail workers and teaching assistants to Starbucks and Amazon, this year’s surge in labour action has been hard to miss. Cornell’s tracker finds a 10 per cent bump in strikes and protests, while National Labor Relations Board data show a sharp rise in new union applications. Some combination of a post-lockdown bounceback and a tight labour market probably explains the shift, but that doesn’t necessarily mean it’s temporary. Tight labour markets could be here to stay. BlackRock’s in-house think-tank has been banging the drum on this: “A smaller share of the US population is in the workforce than pre-Covid. That’s unlikely to change, we think. Why? The participation rate, or the share of people aged 16 and over that have or are looking for work, nosedived when the pandemic hit and people left the workforce [orange line below]. Some of that sharp decline has been made up as people return. But we don’t see it recovering further because the effects of an ageing population account for most of the remaining shortfall. More people have hit 64-years-old, the age at which most retire. That’s taken 1.3mn out of the workforce as of October, we find. Another 630,000 left as the pandemic caused fewer people to work past retirement age and hastened retirement for people coming up to 64 . . .  That implies the workforce will keep shrinking relative to the population. Economic activity will need to run at a lower level to avoid persistent wage and price inflation, especially in the labour-heavy services sector.”

Here’s their chart:

We spoke recently to Ian de Verteuil, a managing director at CIBC, who made the case that investors are not thinking enough about this. He concedes that, in general, organised labour’s position is diminished. But he points to the wage increases already pencilled into union agreements. From a database of union contracts covering 350,000 workers, he calculates that an average of 4 per cent wage growth is locked in for each of the next three years (except 2023, at 6.7 per cent): “[Union contracts] are the only place where you can see one, two or three years out. A lot of wage expectations data [investors use] is backward-looking. But if someone negotiates a contract in the third quarter of 2022 at 6.7 per cent . . . then we’re starting to lock in these higher levels. Why are [employers] still hiring if you can see the slowdown? Part of it is, ‘Gee whiz, we fired everyone during Covid, and couldn’t get them back.’ So even if I have a slowdown, do I let the worker go? . . .  In an environment where we don’t have enough workers now, where we’re bringing manufacturing back to the United States, where unions are starting to demand more and more, where employers are still trying to hire, that is an environment that makes inflation stickier than you think.”

The unionisation rate, de Verteuil said, doesn’t have to budge for wage pressures to persist; what unions are demanding is indicative of labour conditions more broadly.

Along similar lines, Claudia Sahm of Sahm Consulting noted to us that fear of unions could matter as much as unions themselves: “We’ve had this labour shortage long enough that you can see companies pulling these levers [of better pay and accommodations]. Because the thing they want to avoid more than anything else is a union, because a union makes them pull the levers.”

But Sahm welcomes the recent burst of wage growth, and is not very worried about any wage-price feedthrough, citing recent IMF research that found such episodes are historically uncommon. She points out that rising wages will probably eat into margins, but that companies are often loath to increase prices quickly, for fear of losing customers. This is, in our judgment, one of the most important macro questions right now. We wish we knew for sure what’ll happen. But the uptick in union strength suggests that workers’ leverage isn’t going away, even if a recession interrupts. We suspect that this strength can coexist with 2 per cent inflation, but with low confidence. Let us know what you think.

Noah Smith reviews the shift of American innovation from corporate labs to university research and startups but notes that Google’s AI divisions have been an important driver of research in the extremely important frontier of machine learning innovation, “The successes of Bell Labs and other big corporate labs in the mid 20th century has many people thinking that maybe this is an important missing piece of our modern innovation ecosystem. Google’s AI divisions have been an important driver of research in the machine learning space — an extremely important frontier. All told, the research output of Google AI, Google Brain, DeepMind, etc. has been truly staggering: Big private companies (especially IBM) are also very active in quantum computing research. And some “startups” like SpaceX are big enough to do research in-house that pushes the boundaries of general-purpose technology instead of just making a quick buck.“

Noah Smith, “The dream of bringing back Bell Labs,” Noahpinion, December 8, 2022, https://noahpinion.substack.com/p/the-dream-of-bringing-back-bell-labs

The dream of bringing back Bell Labs

I just finished reading The Idea Factory: Bell Labs and the Great Age of American Innovation, by Jon Gertner. It’s a fun and fascinating book chock full of stories about the invention of the vacuum tube, the transistor, information theory, communications satellites, fiber-optic cable, and so on. The personalities really come to life — the pragmatic Mervin Kelly, the arrogant and paranoid William Shockley, the obsessive and curious Claude Shannon, the distractible and creative John Pierce. I highly recommend it.

That said, the book is also a bit frustrating, because it grasps at a general theory of collective innovation, but never quite reaches a conclusion. How much of breakthrough discovery is due to the team vs. the individual? How do incentives and organizational structure matter? How much of the success of Bell Labs was due to the luck of history versus the unique way the organization was set up? The scientists at Bell themselves grappled with these questions, but nobody has ever answered them conclusively.

The way America innovates has certainly changed since the mid 20th century. In a 2019 paper, the economists Ashish Arora, Sharon Belenzon, Andrea Patacconi and Jungkyu Suh document two major trends: the rise of university research, and the decline of corporate labs. Basically, businesses still spend a ton on R&D, but more and more of what they spend goes to development (getting innovations ready for market) than research itself.

Bell Labs is one of the iconic corporate labs, along with Xerox PARC, DuPont’s labs, a few others, whose decline illustrates the general trend.

The authors document two main reasons for the change. First, the government started supporting universities a lot, both with money, and with legal changes (especially the Bayh-Dole Act) that allowed universities to profit from licensing their research to private companies. Second, the maturation of the startup and venture capital ecosystem, increased competition, and a more tolerant government attitude towards acquisitions all pushed big companies to buy innovations rather than producing them in-house. Note the ambiguous effect of antitrust here — stronger antitrust promotes competition (as when Bell was broken up in 1982), while weaker antitrust lets companies substitute M&A for research.

The net result of these changes was to create a sort of supply chain for innovation — universities do the scientific research, startups and university spinoffs and mission-oriented government agencies like DARPA turn insights into inventions, and big companies acquire the inventions and focus on turning them into products. Here’s how the authors sum it up: “In summary, the new innovation ecosystem exhibits a deepening division of labor between universities that specialize in basic research, small start-ups converting promising new findings into inventions, and larger, more established firms specializing in product development and commercialization…Large firms therefore invest in scientific capability not so much to generate knowledge as to be effective buyers of knowledge.”

From the standpoint of economic theory, this sort of supply chain makes a lot of sense. Research discoveries and fundamental inventions are public goods, because they have a strong tendency to leak out across organizational boundaries, making it impossible for whoever did the research to capture the monetary value. The transistor was invented (discovered?) at Bell Labs, by John Bardeen, Walter Brattain, and William Shockley; how much of the total monetary value created by transistors was captured by those individuals, their research teams, or Bell itself? Very, very little of it. This means that private companies have very little monetary incentive to do basic research, which is why economists generally think basic research should be left to universities and the government (or, depending on which economists you ask, to quixotic rich people).

Arora et al. sound a note of caution, though. They point out several attractive features of big corporate labs that the new innovation supply chain might lack. First of all, while many university researchers focus on questions of general scientific interest (how the Universe was formed, for instance), corporate labs tended to focus on the creation of general-purpose technologies — things that had lots of pragmatic industrial uses, like transistors. The inflationary theory of cosmology and the invention of the transistor are both “basic research”, but their economic value is very very different. Second, corporate labs tend to be multi-disciplinary, pulling in researchers from a wide variety of fields and having them work together on projects, while university research — as anyone who has worked in academia knows all too well — tends to be very siloed by discipline.

For these reasons, universities may not be producing the research that would have the biggest economic benefit. Now, you might not care about this — after all, learning where the Universe came from is pretty cool! But at some point we have to face the fact that we’re spending more and more on research but getting only about the same amount of total economic benefit for all that spending:

At some point we should probably think about increasing the economic productivity of scientific research. The successes of Bell Labs and other big corporate labs in the mid 20th century has many people thinking that maybe this is an important missing piece of our modern innovation ecosystem.

Not completely missing, though. As Arora et al. point out, Google’s AI divisions have been an important driver of research in the machine learning space — an extremely important frontier. All told, the research output of Google AI, Google Brain, DeepMind, etc. has been truly staggering:

Big private companies (especially IBM) are also very active in quantum computing research. And some “startups” like SpaceX are big enough to do research in-house that pushes the boundaries of general-purpose technology instead of just making a quick buck. So Arora et al. are probably overstating the changes to America’s innovation structure a bit; as their own data shows, businesses still do quite a bit of research, even if not as much as before.

But could we bring back something as amazing as Bell Labs? Many people argue that Bell’s success was due to very unique conditions that we probably won’t see ever again. I’ll outsource this argument to Ilan Gur, the CEO of the UK’s science innovation agency ARIA, who laid it out in an interesting Twitter thread last January:

Gur argues that there’s just too much well-funded and widely distributed competition for research talent and discoveries these days for an organization like Bell Labs to dominate the landscape. He suggests that instead, we should focus on helping startups do deep fundamental innovation, like Moderna and BioNTech did with mRNA vaccines.

It’s a reasonable thesis, and I think there’s lots of value in deep-tech “super-startups” (a term I just invented) that put tons of money into trying to do fundamental research into mRNA, reusable rockets, aneutronic fusion, generative AI, solid-state Li-ion batteries, Crispr, and any number of other fundamental technologies. But there’s a natural limitation here, which is the whim of the market itself. We just saw a massive decline in tech stock prices. This led to a big crunch in startup funding, especially for expensive late-state startups. So far, software companies seem to have taken the brunt of the current crash, while deep-tech companies are doing OK. But given the natural difficulty of capitalizing on fundamental research discoveries (there’s that pesky public goods problem again!), it seems likely that deep-tech super-startups whose efforts will take many years to see fruition will be in the firing line at some point.

So I think there might still be a role for more Bell-style corporate labs in fields where it seems like there’s lots of important breakthrough research left to be done. In The Idea Factory, Gertner suggests two possible such fields: biotech, and energy. Let’s consider the second of these two.

The energy transition is one of the most important events of our time, both because of the need to avert climate catastrophe and because of the promise of ultra-cheap energy. Right now, while startups are trying to do some basic research in energy tech, most of the effort is being done by universities, government labs, or mission-focused government agencies like ARPA-E. But what if there was a Bell Labs for energy tech?

Google can fund AI research with the money from its quasi-monopoly in search advertising. But who would fund a giant high-class world-beating private lab system to do fundamental energy research? There are no big monopoly companies in the energy space — our big energy companies are all fossil fuel companies, and they’re spending their efforts on slowing the energy transition instead of speeding it up.

So here’s a wacky idea: What about a national electrical utility? Many utilities are already government-sanctioned monopolies at the city level, so the principle of natural monopolies in the energy space is well-established. And the intermittency of wind and solar means it might make sense to run new long-distance power lines between cities. So why not turn this task over to a national-level government-sanctioned utility monopoly, that would own the long-distance transmission lines and would also be allowed to invest in local generation capacity?

In fact, Bernie Sanders already suggested creating a government agency to do this, but that’s probably a political non-starter and would have questionable incentives as well. A sanctioned national utility company — call it Energy Bell — with profit margins limited by law, would be motivated by the profit motive — but with capped margins, the only way it could make profits would be to deliver American customers greater volumes of energy. So just as Bell’s driving mission was to connect the whole world, a monopoly energy company’s mission would be to provide more abundant energy to more Americans (with laws to make sure it’s mostly or entirely clean energy).

Meanwhile, the comfy position of a sanctioned monopoly would give Energy Bell the long time horizon to establish its own big corporate research lab, focused on solving deep fundamental scientific problems related to energy — solid-state batteries, batteries that don’t use lithium, aneutronic fusion, seasonal energy storage, solar panel and battery recycling, or whatever. And just to provide a little extra incentive, doing this research could be a condition of Energy Bell’s continued existence, written right into its charter.

And Energy Bell’s large scale could give it the money to hire many of the world’s best researchers in a number of disciplines and put them to work in multidisciplinary, cooperative ways. If we allowed Energy Bell to ignore the cap on employer-sponsored green cards, it would be even easier to assemble this super-team.

Anyway, I realize this is a wacky idea, and very unlikely to happen. We’re in an era of rising distrust of big monopolies, and lots of people in both industry and politics would likely resent a company like Energy Bell. On top of that, there are probably a bunch of technical problems with the idea that I haven’t yet thought of. But if we wanted to bring back something akin to the old Bell Labs, in an incredibly crucial area of fast-moving technology, I think this would be a promising way to do it.

Barring something like an Energy Bell, though, I agree with Ilan Gur that we’re unlikely to see something quite like Bell Labs in our lifetimes. The university-DARPA-startup innovation system is probably here to stay, and we should focus on finding ways to make this technological supply chain work in a more efficient, purposeful, and well-integrated way.

Over the past 12 months, only 20% of American workers have experienced real hourly earnings growth. Outside the leisure and hospitality, information and transportation, and warehousing sectors, wage gains fell short of 5.9% PCE price index inflation, "Because of high inflation, most workers are experiencing declines in their real wages. Wages are growing most rapidly in the leisure and hospitality, information, and transportation and warehousing sectors, where gains over the past 12 months have been between 6.5 and 9% (figure 6).The wage gains for these industries—representing about 20% of employment—are above the 12-month change in consumer prices. In other sectors, wage increases have fallen short of consumer price increases (except for construction and utilities, where average wage growth has roughly kept up with inflation)."

US job and wage growth beat expectations, making the Fed's job harder

The US labor market remains very tight according to the November employment report. Nonfarm payrolls increased by 263,000 last month—above market expectations of 200,000 (figure 1). Over the past three months, payrolls are up by an average of 272,000 per month; this pace is only half that seen in early 2022, but it is still robust. The unemployment rate was unchanged in November at 3.7 percent, remaining near its lowest level in 50 years, and the labor force participation rate, at 62.1 percent, was still roughly where it was earlier in the year.

Another sector that has seen a considerable slowing of payroll employment growth is transportation and warehousing. Employment growth in this sector was rapid during much of the pandemic, as consumers focused their spending on goods rather than services to avoid contracting the virus, and shopping moved further online. Labor demand in this sector might be slowing, as real consumer spending on goods has not grown over the past year and the expansion of e-commerce may be abating. However, wage growth remains strong in this sector, which suggests that employment growth might be held back more by a shortage of workers than by a slackening of demand. Even with the recent decline, the level of employment in the transportation and warehousing sector remains well above its pre-pandemic level.

ALTHOUGH THE US LABOR MARKET HAS COOLED SOMEWHAT, IT REMAINS FAIRLY STRONG

At 272,000, the average change in nonfarm payrolls over the three months ending in November is nearly 40 percent higher than the average monthly gain in the second half of the 2010s. And, payroll growth continues to be positive in almost all the major industries (figure 3). Nonfarm payroll growth remains positive even in construction, an interest-sensitive industry where activity has weakened since the Federal Reserve began raising interest rates earlier this year.

Employment in temporary help services has been a bellwether of recent recessions—with employment in this category starting to decline a number of months before the business cycle has peaked (figure 4). This series has slipped a bit in recent months after running at high levels during the first half of 2022. The pattern is consistent with a cooling labor market, but, as yet, the cumulative decrease is small and there have been instances where small declines have occurred without a subsequent recession.

One benefit of tight labor markets is that they tend to close employment gaps between workers who are traditionally more and less advantaged. Such gaps narrowed in the robust pre-pandemic labor market and are relatively narrow now (figure 5). The unemployment rate for workers who stopped their education with a high school diploma is currently only 1.9 percentage points above that for workers who have a bachelor’s degree or higher—about as large of a gap as that seen just before the pandemic and only about one-third the size of the gap seen at the same point after the onset of the 2007-2009 “Great Recession”. A similar pattern holds for the difference between the unemployment rates of Black workers and white workers, and the gap for those with and without a disability has also fallen to a relatively low level.

WAGES, THOUGH RISING, AREN’T KEEPING UP WITH INFLATION FOR MOST WORKERS

A key difference from the late 2010s is that, because of high inflation, most workers are experiencing declines in their real wages. Wages are growing most rapidly in the leisure and hospitality, information, and transportation and warehousing sectors, where gains over the past 12 months have been between 6.5 and 9 percent (figure 6). The wage gains for these industries—which represent about 20 percent of employment—are above the 12-month change in consumer prices. In other sectors, wage increases have fallen short of consumer price increases (except for construction and utilities, where average wage growth has roughly kept up with inflation).

Inflation in the United States remains well above the Federal Reserve’s goal of 2 percent, eroding the purchasing power of income for most workers and creating true hardship for some. The November employment report suggests that demand and supply in the labor market are moving—gradually—into better alignment. However, the current pace of wage growth is still considerably higher than that consistent with the Fed’s goal, and key measures of labor market tightness, such as job openings per unemployed worker and the quits rate, remain well above their historical averages.

Creating more slack in the labor market will require a further softening of aggregate demand, implying that the Federal Reserve will need to continue tightening financial conditions until it can be confident that the necessary labor market slack has been created. As a result, the unemployment rate is likely to rise, perhaps considerably, and job losses will probably be disproportionately concentrated among less-advantaged workers. These significant costs underscore the importance of a robust US safety net. But not acting now to bring down inflation would raise the risk that inflation becomes stuck at a high level or rises further, and restraining inflation at that point would require an even sharper and more costly reduction in economic activity.

Political transformations tend to occur during a “youth boom” when the share of the population aged 15-29 exceeds 28%. The proportion of youth aged 15-29 in China stood at just 17% last year, and the median age was 42, "A country can be said to be having a “youth boom” when the proportion of people aged 15-29 exceeds 28%. When a country is experiencing a youth boom, it may also find itself on the path to political change - including, potentially, democratization. That was the case in Taiwan and South Korea. As the share of young people increased - from 25% in each country in 1966 to a peak of 31% in the early 1980s - so did economic growth and pro-democratic fervor. Both economies became democracies in 1987 when their populations’ median age was 26. In April 1989 - when the proportion of youth was at its peak of 31%, and the median age was 25 - student-led demonstrators occupied Tiananmen Square in Beijing. It took a bloody crackdown that June to crush the movement. The proportion of youth aged 15-29 in China stood at just 17% last year when the median age was 42."

China’s Activist Shortage

Protesters have taken to the streets of China’s cities in a rare show of political dissent. While the demonstrations are focused largely on the authorities’ zero-COVID policy, they have sparked speculation that a pro-democracy movement - and even a Taiwan-style political transition - could come next. But this is unlikely, not least because decades of strict family-planning policies have left China with too few young people to join the fight.

A country can be said to be having a “youth boom” when the proportion of people aged 15-29 exceeds 28%. As the most economically dynamic, politically passionate, and physically active members of society, people in this age cohort are particularly likely to challenge norms, participate in protests, and demand reform. So, when a country is experiencing a youth boom, it may also find itself on the path to political change - including, potentially, democratization.

That was the case in Taiwan and South Korea. As the share of young people increased - from 25% in each country in 1966 to a peak of 31% in the early 1980s - so did economic growth and pro-democratic fervor. Both economies became democracies in 1987, when their populations’ median age was 26. A youth boom also contributed to the eruption of the Arab Spring uprisings in 2010, when the median age across the Arab world was just 20.

A similar trend once seemed to be unfolding in China. The share of young people in China’s population rose from 24% in 1966 to 28% in 1979, when the median age was 22. Growing political - though not democratic - fervor helped to fuel the Cultural Revolution of 1966-76. Political engagement among young people also helped to drive the reform and opening up that Deng Xiaoping launched in 1978, and sparked some social unrest.

In Xinjiang province, the unrest came later. While the region was not experiencing a youth boom in 1989, the proportion of Uyghur youth exceeded 28% in 1996, and peaked at 32% in 2008. The next year, Xinjiang was roiled by the so-called Ürümqi Riots, which began as a peaceful student-led protest over the killing of two Uyghur factory workers but quickly descended into violence. The 2008 Lhasa riots in Tibet are also correlated with a youth boom.

Today, young people are again at the forefront of protests in China. But there are not so many of them anymore. The proportion of youth aged 15-29 in China stood at just 17% last year, when the median age was 42. And the share will only continue to shrink, likely dropping to 13% in 2040, when the median age is expected to reach 52.

It is difficult to achieve political transformation in a country with a median age over 40 and youth accounting for less than 20% of the population. The protest movement that emerged in Hong Kong in 2019 to defend the city’s democracy ended in failure, partly because, with a median age higher than 44, the territory has entered political “menopause.” Only 16% of its population is aged 15-29.

Of course, repression also plays an important role in crushing such movements, and China’s rulers have not hesitated to suppress, censor, and subdue. But it is the declining youth population that is ultimately depleting society of the will to fight for democracy. What the Chinese authorities need to worry about is not the threat to regime security, but social rigidity, because there will not be enough young people to support benign reforms like the one in 1978.

The members of the one-child generation are overwhelmingly “little pinks,” preferring to support the government, rather than pursue sociopolitical change. Their parents are not exactly primed to lead a revolution, either, and not only because older generations tend to prefer the status quo. With only one child to support them in retirement, they know that they will have to rely on the government for social security, health care, and the rest of their retirement safety net.

The one-child policy has led to a decline in China’s average household size from 4.4 people in 1982 to 3.4 in 2000 and 2.6 in 2020, leading to a reduction in families’ needs and, in turn, an increasingly powerful government. In 1983, China’s household disposable income accounted for 62% of GDP, but declined to 44% in 2021. (The global average is 63%.) Despite four decades of rapid economic growth, China does not have a large enough middle class. A fragmented, economically strained society may mount protests, but none that would be sustainable or large enough to challenge a powerful regime, let alone bring about a democratic transition. Because aging leads to economic slowdowns, China may never escape the middle-income trap or achieve a political transition.

To be sure, if household disposable income rises to 60-70% of GDP, China may have to pursue paradigm-shifting economic, political, and social reforms, as well as change its foreign and defense policies. This would produce a more Western-style political system and lead to improved relations with the United States.

But, despite its weaknesses, China’s political system is not in immediate danger, though maintaining its governance model is a formula for eventual demographic and economic collapse. Tibet’s political system survived for more than a thousand years after its population began to decline in the eighth century. Chinese authorities should feel politically secure enough to return to a more benign Confucian system, with the government working to restore population sustainability and socioeconomic vitality, though it is hardly clear that they will.

When China joined the World Trade Organization two decades ago, many anticipated that the country’s economic opening would inevitably lead to greater democratization. Instead, China increased censorship and repression, while becoming a producer of everything its people - and the rest of the world - could want. What China has not produced is enough Chinese people to secure its future and sustain progress toward democratic reform.

GS forecasts that by 2075 both India and China will have slightly larger GDP than the US, but US real per capita GDP will rise from $69k in 2021 to $132k, vs. 2075 forecasts of $55k for China and $31k for India, "Exhibit 17 sets out our 2075 GDP level projections, broken down by population and GDP per capita levels. Two points are notable: First, there is a large gap between the largest three economies (China, India and then US) and all other economies (although the Euro area represents a fourth economic superpower, if it is treated as a single economy). Second, while China and India are projected to be larger than the US by 2075, our projections imply that the US will remain more than twice as rich as both (and five times as rich as countries such as Nigeria and Pakistan)."

In October 2022, the retired share of the American population was 1½ percentage points above its pre-pandemic trend. These 3.5 million workers account for essentially all of the shortfall in labor force participation rates., “…Despite some improvement in the labor force participation rate for the working-age population since the early stages of the pandemic, the LFPR in October 2022 remained nearly 1½ percentage points below its pre-pandemic, February 2020 level (after making adjustments for changes in population weights introduced from the 2020 Census). The importance of retirements in accounting for this shortfall is illustrated in Figure 1, which shows the percentage of the working-age population that is not in the labor force for different reasons (black line) relative to February 2020, based on responses to the Current Population Survey. While earlier in the pandemic, factors other than retirements were an important contributor to elevated non-participation (such as non-participation while caregiving, the orange line), the percent of the population that was not in the labor force and retired (the “retired share”) has steadily increased and in October 2022 was almost 1½ percentage points above its pre-pandemic level, representing an increase of more than 3½ million retirees and accounting for essentially all of the total shortfall in the LFPR….”

The Evidence The pre-pandemic trend, “…Even in the absence of the pandemic, the retired share would likely have risen, albeit more gradually, due to shifts in the age distribution of the population toward ages traditionally associated with higher retired shares (primarily, the movement of the Baby Boomer cohort into older ages). As one illustration of the importance of population aging, Figure 2 plots the retired share (solid line) alongside a counterfactual trend (dashed line)….”

“…. This trend is an estimate of how the retired share would have evolved in the absence of the pandemic and is derived by assuming the continuation of pre-pandemic, age-specific trends in retired shares, assuming the state of the business cycle remained similar to pre-pandemic levels, and accounting for the actual changes in the age distribution over this period (in section III, we discuss in more detail the calculation of this and other counterfactual retired shares). Over the five years prior to the pandemic, the retired share increased about 0.2 percentage point per year, and plausibly would have continued increasing at a similar pace in the absence of the pandemic. As of October 2022, the retired share remained 0.6 percentage point above the pre-pandemic expected trend, or about 1.6 million people (Figure 2). This gap between the actual and expected lines is an estimate of “excess retirements,” and the excess retirements gap remains sizeable. In fact, the retired share was slightly below trend just prior to the pandemic (about 0.2 percentage point), implying that excess retirements as a share of the population have increased by about 0.8 percentage point since February 2020, or about 2.1 million people. That increase in excess retirements explains a little more than half of the 1.4 percentage point increase the total retired share since February 2020, whereas the increasing expected retired share explains the rest (see Figure 3)….”

“…Thus, less than half of the increase in the retired share to date would likely have occurred even in the absence of the pandemic, suggesting that more than half of the current LFPR shortfall is a direct result of the pandemic on retirement….First, as discussed above, more than half of the increase in the retired share relative to February 2020 is due to an increase that would have been expected in the absence of the pandemic. Second, about two-thirds of the total increase in the excess retired share is attributable to those who were age 65 and older at the start of the pandemic, with a particularly sharp increase in excess retirements among those age 70 and older. The remaining one-third of the increase in the excess retired share is attributable to those age 55 to 64 when the pandemic began. Third, there is also substantial heterogeneity across education, race, and ethnic groups, with retired shares for those age 65 and older increasing more than expected for Whites relative to Blacks and Hispanics, and for those with a college education relative to those without….…Because the retired share has remained significantly elevated since increasing substantially at the start of the pandemic and has shown little sign of converging towards its ex-pandemic counterfactual, it may take some years for retirement behavior to normalize relative to pre-pandemic norms and for the retired share of the population to converge toward what it would be in the absence of pandemic-related influences. We view it as unlikely, however, that the retired share will fall substantially towards its pre-pandemic trend and that those who retired early will return to the labor force in large numbers, since most of the excess retirements are concentrated among people who are 65 and older who (given their age) would likely be retiring in greater numbers anyway over the next few years. That assessment is supported by the stabilization of the unretirement rate at its pre-pandemic level, well below the level it would need to reach for the retired share to fall substantially…”

Joshua Montes, Christopher Smith, and Juliana Dajon, ” “The Great Retirement Boom”: The Pandemic-Era Surge in Retirements and Implications for Future Labor Force Participation,” Federal Reserve Board, November 2022, https://www.federalreserve.gov/econres/feds/the-great-retirement-boom.htm