False Alarmist of Shirnking Populations

The article, 'The False-Alarmists Behind this Shrinking Population Panic', written by economist Dean Baker, uses simple arithmetic and data to make a case on why there is a false fear behind baby boomers sharply lowering the worker to retiree ratio. He notices, while the retirement of baby boomers will lower the living standards of workers, the numbers don't seem devastating and the growth in productivity will lessen the blow. Fear, Baker says, comes from employers and wealthy policy makers, who fear that the smaller labor force will increase the wages. In the end, he predicts that higher wages will lead to a higher standard of living.

Baker makes a great case on the over-stressed burden on future workers and higher standards of living. But the decrease in worker to retiree ratio should be a concern because both productivity growth and higher wages may not be sustainable in the future.

Baker predicts that productivity growth will be sustainable and have a constant rate of 1.5% annually just like it has been over the past two decades. This could lift a huge burden on the workers supporting the retirees as more output could be produced. As there is a huge ambiguity on whether productivity will continually grow, Economist such as Robert J. Gordon doesn't believe productivity will keep rising like it did in the past. He believes that we have reached a limit upon improvements in technology and the best innovations are behind us.

Gordon also believes that one the reasons for the lack of future innovations is due to a smaller labor force (demographics). When there is a smaller labor force, there are less people working on innovative jobs such as research and development to come up with new technology and ideas. While Baker believes that productivity growth and a smaller labor force could go hand in hand it could be challenged that a smaller labor force could lead to a lower productivity growth.

Even though productivity can increase living standards, Baker believes the main factor for a high living standard would be the smaller labor force pushing up the wages. It is important to note that wages are equal to the marginal product of labor. Marginal product of labor means how much output an extra unit of worker could produce. A firm could avoid increasing cost if a higher wage employee could produce more output. Initially, the marginal productivity of labor will increase since capital stays constant, each worker will have more capital to work with.

In the short run, wages may go up, but; if the marginal productivity is not increased proportionate to the wages, the high wages given to the workers will not be sustainable. If the increase in wage was dominated by shortage of labor supply instead of marginal product of labor, markets will adjust by either hiring less or firms going out of business to demand less labor until wages fall back to its marginal product