Thursday, April 25, 2013

Demographic Mesofacts

Why is population such an important metric to economic development? I argue that the obsession with shrinking cities and brain drain are a relic of the Manufacturing Economy. The conceptual framework is a century old. A lot has changed since 1910. Apparently, our understanding of demography has yet to catch up:

Here’s an economic indicator you may not have thought about: population growth. All things being equal, population and economic growth move in tandem. That tells you why no one should be particularly surprised to find that in 2012, Spain’s population dipped for the first time since the 1940s.

Population rises and falls with economic fortunes for good reasons. When the economy is weak, people tend to put off having children, while in good times larger families flourish – hence the reason that family size declined in most of the developed world during the 1930s, and shot up during the buoyant economic boom of the 1950s. As well, there is some evidence that health deteriorates when an economy weakens, and death rates rise. The most direct way that the business cycle affects population, however, is through migration – basically the people in and out of an area. If an economy is thriving (think Alberta during any oil boom), people flood in. When times are tough (Alberta when oil prices plunge), people head elsewhere to look for work.

Spain these days is very clearly a “bust” rather than a “boom” economy. The economy has been in recession, more or less, for something like five years. The official unemployment rate was 26 per cent during the final quarter of 2012, and the youth unemployment rate was more like 55 per cent. To cap off the misery, the inflation rate is a relatively high 2.3 per cent. The standard of living in the country, accordingly, has been falling quickly. So it is not surprising that those who can are streaming out of the country in search of better prospects.

Emphasis added. Now a bit about the author of this opinion piece:

Prior to joining BNN, Linda was a Senior Economist with CIBC, where she spent ten years honing her analytic skills and becoming a sought-after speaker and media commentator. Earlier in her career she was an economist with the federal government where she specialized in demographic and labor market forecasting.

Ms. Nazareth has some pretty serious chops, including an advanced degree in economics from the University of Toronto. For someone who "specialized in demographic and labor market forecasting", the above passage is odd. Consider Japan:

Fukao has calculated that the shift toward part-time workers in the 1990s alone reduced Japan’s human capital—its collective store of workforce knowledge and competencies—by 2 percent. This may not sound like much, but modern economies run on human capital, and any decline in this precious resource has an outsize impact on growth.

In 1992, 80 percent of young Japanese workers had regular jobs. By 2006, half were temps. (Over the same period, the portion of young Americans working as temps stayed put at one-third.) Only 2 percent of nonregular workers transition to regular work each year in Japan. Most of today’s young temps will probably never hold regular jobs.

We do not know for certain that Japan’s lost generations, once a symptom of economic decline, now perpetuate that country’s malaise; the evidence for a feedback loop is only circumstantial. But the marked deterioration in Japan’s job market began in 1993. It is perhaps not a coincidence that Japan’s economy today is smaller than it was in 1992.

Japan is dying. A lot of countries are dying. You see, prosperity and birth rates move in tandem. Better education and more wealth positively correlate with less children:

In a recent book, "Whither the Child?" (Paradigm press, available here) Mr Lutz and two co-authors argue that if you take improving educational standards properly into account, the optimum fertility rate is lower than the replacement rate – 1.8 not 2.1. This happens because, they say, education is expensive (hence having slightly fewer children is rational) and also because better-educated people earn more and can therefore support more children and retired people through their labour.

Emphasis added. Having slightly fewer children during good times is rational. Ms. Nazareth appeals to our general sense about the way the world works. Mesofacts. 1930s bust. 1950s boom. Many economic development practitioners use the same logic and ignore the changing demographics. A lot of economic development policies are in dire need of an update.

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