How Millennials Could Restore American Prosperity

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The millennials are coming—and that could be good news for economic growth.

About 73 million Americans were born between 1981 and 1996. This oft-maligned cohort will become the single-biggest age group in the U.S. this year, according to the Pew Research Center. Their maturation will have significant consequences for American society. One of those consequences could be a marked acceleration in productivity growth over the next two decades.

That would be welcome news, because Americans seem to have stopped getting much more efficient in recent years. According to an estimate from the Federal Reserve Bank of San Francisco, the underlying productivity of the U.S. economy has grown just 5% since 2005. Had productivity increased at its 1947-2005 average rate since 2005, the value of what Americans produce today would be about 15% greater. The shortfall effectively cost the U.S. about $3.1 trillion in 2018 and is likely to be even bigger this year.

Many pixels have been devoted to arguing about the causes of—and potential solutions to—the productivity slowdown. Some, such as Robert Gordon of Northwestern University, believe humanity has simply run out of big new areas for improvement. His fatalistic thesis is that today’s innovations (Uber, but for dog-walking) are simply less meaningful than electric lighting, indoor plumbing, and the airplane.

On the opposite end of the spectrum are those, usually in the tech industry, who deny the existence of the problem entirely because they believe standard measurement techniques are insufficient to capture the massive benefits attributable to, say, algorithmic recommendations for streaming videos.

The Coming American Renaissance?

Share of U.S. 20-64 population aged 40-49

Productivity

growth

accelerates

as baby

boomers

mature

Millennials set

to enter peak

productive years

Aging boomers drag

down productivity

growth

Productivity

growth slows

as young

babyboomers

flood the

workforce

Productivity

growth

accelerates

as baby

boomers

mature

Millennials set

to enter peak

productive years

Aging boomers drag

down productivity

growth

Productivity

growth

slows

as young

babyboomers

flood the

workforce

The slowdown is not unique to the U.S. A 2017 study by economists at the International Monetary Fund found that the yearly average growth rate of underlying productivity slowed by about one percentage point across the rich world since the mid-2000s. Part of the explanation, in their view, was the financial crisis. Businesses put off making new investments in research and machinery because they were afraid of losing access to credit, or simply wanted to avoid ending up stuck with excess capacity in a world with fewer customers. Entrepreneurs had a harder time raising funds to support new businesses, while unemployed and underemployed workers had less time to gain professional experience and job skills.

The financial crisis, however, while significant, could not have been the only explanation, because the slowdown predated the recession by several years. Moreover, the severity of each country’s productivity slowdown does not seem to be closely correlated with the severity of its crisis. One explanation is that companies now require many more researchers to generate a given amount of technological innovation than they did in the past, and this “cost” continues to rise for everything from semiconductors to pharmaceuticals to agriculture. Another is that competition has declined across industries, with rising concentration and higher returns to the winners in decreasingly dynamic markets.

The rate of productivity growth is also affected by the composition of the workforce. Not all workers are equal. Some have more schooling than others, some have more experience than others, some are more creative than others, and some are more hidebound than others. Changes in the relative proportions of these types of workers can have substantial economic effects.

The rapid pace of U.S. productivity increases between 1940 and the mid-1970s is partly explained by the soaring share of Americans graduating from high school and college during that period. In 1940, just 38% of Americans had finished high school by the age of 30, and just 6% had received a four-year college degree. By 1975, those ratios had increased to 85% and 25%, respectively. Since then, however, further increases in educational attainment have been modest: As of 2017, the high school completion rate was 92% and the college completion rate was 36%.

The overall age of the workforce is also important. Dartmouth College economist James Feyrer first made this argument in 2002. Workers who are young and inexperienced tend to be bad at their jobs, while those who are old tend to be set in their ways and unwilling to embrace new ideas. Feyrer found that the growth rate of productivity tended to track changes in the proportion of workers aged 40-49.

Most patents in the U.S. are filed by workers in their 40s, and the managers best able to adapt to new technologies are neither too young nor too old. Subsequent research showed that this relationship holds across countries.

U.S. productivity began to slow to a crawl as young and inexperienced baby boomers flooded the workforce. Between 1965 and 1981, the share of Americans aged 40-49 collapsed. The growth rate of underlying productivity followed shortly thereafter. By 2003, however, those same boomers had matured into their most productive decade, dramatically boosting the share of workers in their 40s by nearly 10 percentage points. Feyrer predicted (correctly) that U.S. productivity growth would slow after that as the boomers aged. Since 2005, the number of Americans aged 40-49 has shrunk more than 10%.

The good news is that the millennials will soon come to the rescue. Most of them are now in their early 30s, but this cohort will soon reach their most productive years in the next two decades. According to the latest projections from the United Nations, the number of Americans aged 40-49 will hit bottom in 2019 before rising by more than 20% by 2039. Among Americans of working age (20-64), the share aged 40-49 should rise by more than three percentage points.

If past relationships hold, this could lead to a meaningful acceleration in the growth rate of underlying productivity. Those with a long-term time horizon should be optimistic the future will be better than the recent past.

Write to Matthew C. Klein at [email protected]

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