Off Balance: The Changing Demographics of Our Macroeconomy

January 6, 2020

By nwilkas on January 6, 2020
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The U.S. economy is a massive, complex organism, made up of innumerable moving parts. Change one of those parts and often, it’s relatively inconsequential. Change a lot of those parts and suddenly, balances can shift.


For example, let’s say one person who traditionally might not have decided to enter the workforce does. Inconsequential. Let’s say half of a country’s population, who has been largely sidelined from the workforce, is prompted by changing cultural norms to start working in large numbers. We get a huge change in our country’s labor force and an increase in the amount our country can produce, as we saw as a result of the women’s liberation movement that started in the 1960s.

Here’s another example. Let’s say that one family decides to have only one child, which is less than the standard birth rate. Inconsequential. Let’s say generations of a population start having lower birth rates for myriad interconnected reasons, from higher participation in the workforce to older first-time parents to higher debt-to-income ratios. Massive consequences.

That scenario has been playing out as part of the demographic trend over the past few decades, both in the U.S. (Exhibit 1) and around the world. In addition to negative dispositions toward work, older populations are living longer due to medical advances, and in the U.S., one of the largest generational groups—the baby boomers—is entering retirement. As a result, immense change is affecting economic growth.


While it’s too early to say exactly how these major changes will affect a system as complex as the U.S. economy, the issues are too significant to ignore. This is a recurring topic in our investment team’s long-term, fundamental discussions, and we wanted to take this opportunity to briefly highlight some of the areas these potentially tectonic shifts will likely impact.

Impact on Labor Market

To start, let’s look at one of the areas most immediately and consequentially impacted: the U.S. labor market.

Prior to 1960, the labor force participation rate was between 58% and 60%. Our national population grew in the ’60s and ’70s as the baby boomers became of working age (Exhibit 2). The participation rate peaked in the early 2000s, largely due to the growth in new business formation during the dot-com bubble.


Since 2000, the participation rate has been steadily declining and has yet to significantly increase, even during our current economic expansion. Our economy’s unemployment rate is currently at an all-time low, and yet the labor force participation rate hasn’t budged. Why this discrepancy?

One reason is the lack of willingness within the labor force to work. The labor force participation rate is measured by those within working ages (generally 16 – 64) who are either currently employed or seeking employment.¹ But if wages are low and if there’s a large gap between high-paying and low-paying jobs, there’s less incentive for the labor force to work. The large gap between high-paying and low-paying jobs makes it much more difficult for employees to climb the ladder within their professions, often leading to accepting a much lower-paying position. It is important to note that within the prime working age segment (generally 25 – 54), the employment-to-population ratio has been improving, but it still remains below levels seen in the previous economic cycle.

Why is it important to see an improvement in the participation rate? Because a broader gain in employment and wage growth—for instance, in higher-paying middle-class jobs—leads to higher consumer incomes and spending. That leads to the next area of impact: economic growth.

Impact on Economic Growth

Let’s say you cut a factory’s workforce in half. What’s going to happen to that factory’s growth rate? That’s one of the most pressing questions on the minds of economists and investors alike: How will recent demographic trends like a reduced labor force impact the growth of our economy? The simple measure for a country’s growth is gross domestic product (GDP), calculated roughly as a function of available capital, available labor, and technology.² Decreasing one of these factors and not offsetting it with an increase in one of the others will, theoretically, result in a lower level of GDP growth.

Another factor of economic growth is savings. People’s savings habits vary throughout each phase of life, as illustrated in the life-cycle hypothesis (LCH) model. Typically, in an individual’s early and later years, the savings rate is lower. It reaches its peak during primary working years (20 – 65 years old), resulting in the steep, concave curve we see in Exhibit 3. According to the LCH model, millennials — who are currently between ages 23 and 38 — are now in their peak saving years. And on top of this, some economists speculate that millennials might actually be saving more than previous generations. In August 2019, the U.S. personal savings rate was 8.1%, compared to a rate of 5.7% in 1996.³ This savings rate is for the whole population, not just millennials, so it’s difficult to draw concrete conclusions, but some economists believe it could partially be a result of millennials saving more than some of the generations before, whether due to the current extremely low unemployment rate, residual scars from the Great Recession, or just generational change.

Why is it important to note the saving habits of different generations? Because less spending and more saving means less cash flow in the economy. Couple millennials’ higher savings rate with their student loan debt, and we could see a potential decrease in consumer spending—something that generates 70% of our economy.⁴


Impact on Policies

Further demographic changes expected in the coming years are significant enough that they will likely also affect major governmental policies and programs, such as the primary source of publicly funded retirement income, Social Security. It is projected that by 2060, nearly one in four people will be over the age of 65 (Exhibit 4). Additionally, the life expectancy for a 65-year-old has changed over the last 30 years (on average, 65-year-olds now live an additional 20 years, four years longer than was projected three decades ago) and is expected to continue going up (Exhibit 5).

More people living longer means more retirement years to draw on public programs like Social Security and more pressure on the working-age population to provide the financial support for these programs.

The fact that Social Security is predicted to run out of money by the year 2035, due in part to the large mass of the population entering retirement in the coming years, only exacerbates the issue. Given the low workforce participation relative to the population, the demand on Social Security is much higher than the supply. To continue providing benefits, Social Security will likely need to undergo drastic policy changes that account for the changes to population demographics. An example of the type of change the government could implement would be an increase in payroll taxes to grow the fund and meet the demands of current beneficiaries. Without changes, millennials and Generation Z (those currently younger than 23 years old) could see significant reductions in their future Social Security benefits, if the program can even remain solvent.



As with any ecosystem as complex as our economy, it’s hard to say how exactly these demographic changes will play out, but it’s clear that our current trajectory isn’t sustainable. Something will have to change. Maybe we’ll see government officials move past their gridlock to implement real policy change. Or maybe the “youth boom” that some economists speculate about — the jolt our economy could see as Gen Z combines forces with millennials — will be enough to offset the wave of retiring baby boomers.⁵ Or maybe we’ll see technological advancements in the next few decades that can compensate for the expected decline in workforce participation and thus productivity.

Although we don’t know how it will play out, we agree with Warren Buffett’s sentiments from 2008: “It’s never paid to bet against America. We come through things, but it’s not always a smooth ride.” We will continue to watch closely and ascertain both near- and long-term impacts on the market, particularly as they relate to specific sectors of the economy. While we do not expect to see meaningful effects from demographic changes in the next few years, we do expect to see them in the next few decades. And at RMB, maintaining a long-term view is a central tenet of our investment philosophy. Therefore, we are regularly considering the long-term impacts of issues like these so that we can better serve our clients for generations to come.


¹ “Definition of ‘Labour Force Participation Rate,’” The Economic Times, accessed on November 6, 2019,

²  Janet Adamy and Paul Overbeg, “U.S. Population Grew at Slowest Pace in More Than 80 Years,” Wall Street Journal, December 19, 2018.

³ Nick Timiraos and Sarah Chaney, “Fueled by Strong Economy, U.S. Labor Force Defies Projected Declines,” Wall Street Journal, March 23, 2019.

⁴ Roger Lowenstein, “U.S. Savings Bind,” The New York Times Magazine, October 14, 2009,

⁵ “Millennials, Gen Z and the Coming ‘Youth Boom’ Economy,” Morgan Stanley, January 25, 2019,


Additional Sources

Chappelow, Jim. “Gross Domestic Product—GDP,” Investopedia, June 27, 2019.

Darda, Michael. “MacroStrategy: October NFP Report: Solid, But …” MKM Partners, November 1, 2019.

“Demographic Change,” UBS, November 7, 2018.

Ezrati, Milton. “Aging Demographics: A Threat to the Economy and to Finance,” Forbes, April 23, 2018.

Feeney, Caroline. “Halfway into 2019, How Is the Housing Market Holding Up?” Forbes, July 1, 2019.

Guilford, Gwynn. “The U.S. Unemployment Rate Is at a 48-Year Low—So Why Are So Many Americans Still Out of Work?” Quartz, October 5, 2018.

Hayes, Adam. “How Demographics Drive the Economy,” Investopedia, September 30, 2018.

“How the Gen Y+Z Boom Rolls through the US Economy,” Morgan Stanley, June 9, 2019.

Ip, Greg. “How Demographics Rule the Global Economy,” Wall Street Journal, November 22, 2015.

Irwin, Neil. “America’s Biggest Economic Challenge May Be Demographic Decline,” The New York Times, April 3, 2019.

Winck, Ben. “Here’s Why You Still Can’t Get a Raise, Even with Unemployment at a 50-Year Low,” Markets Insider, October 6, 2019.


The opinions and analyses expressed in this communication are based on RMB Capital Management, LLC’s research and professional experience, and are expressed as of the date of our mailing of this communication. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. RMB Capital makes no warranty or representation, express or implied, nor does RMB Capital accept any liability, with respect to the information and data set forth herein, and RMB Capital specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication do not constitute legal, tax, accounting, investment, or other professional advice. 

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