A growing population does not guarantee a growing economy

Last week I wrote about the common idea that, with an ageing population, Minnesota faces a labor shortage. The common argument goes like this

As the state’s economy expands new jobs are created but there are too few workers to fill them. This poses a threat to continued economic expansion. The solution to the supposed worker shortage is increased immigration.

I explained that, with sufficient innovation and investment, we could see continued economic expansion even as the workforce declines. In other words, an ever increasing number of workers is not a necessary condition for per capita income growth.

Population and economic growth

Evidence from around the world suggests that a booming population is no guarantor of economic growth.

According to data from the World Bank, the top ten countries in the world for population growth in 2016 included Equatorial Guinea (2), Qatar (4), Angola (5), Democratic Republic of Congo (7), Jordan (8), Burundi (7), and Chad (10). Out of 178 jurisdictions the World Bank has data for on economic growth in 2016, these countries ranked 176th, 107th, 159th, 108th, 112th, 161st, and 175th respectively.

Indeed, it seems to be the case that faster population growth is correlated with slower economic growth.

Economists Sean Fox and Tim Dyson summarize the research;

In 2001, Birdsall and Sinding summarised the new position, stating that “in contrast to assessments over the last several decades, rapid population growth is found to have exercised a quantitatively important negative impact on the pace of aggregate economic growth in developing countries” ([xiii]). A recent meta-analysis of this research concluded that a negative relationship emerged in the post-1980 data, and that its strength has increased with time ([xiv]).

Figure 1: Population growth and economic growth, 1950-2008

Moreover, as Figure 1 illustrates, the simple cross-sectional relationship between population growth and economic growth is clearly negative when viewed over the long run (i.e. 1950-2008).

Its the productivity, stupid

If you add more people to an economy you will see more economic activity. But there will be more people to divide the goods and services up between. The point is to increase the outputs at a faster rate than the inputs. This is the essence of productivity. As the economist Paul Krugman has written

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.

With an aging population Minnesota undoubtedly faces economic challenges in future. But the solution is not to add more inputs unless those inputs are more productive than those we have now. Innovation and investment are what matter. Economically speaking, productivity really is almost everything.

John Phelan is an economist at Center of the American Experiment.