Baby Boomers exiting the workforce when they hit retirement age is definitely impacting the labor market, but not in the way many might think, according to a briefing from Yardeni Research Wednesday.
According to a St. Louis Fed study Yardeni cited, the productivity slowdown of today is pretty similar to the slowdown in the 1970s. "Essentially, productivity has declined because the Baby Boomers are retiring and being replaced with younger and less productive workers," Yardeni wrote.
It's not necessarily that the Baby Boomers are working less and leaving a gaping hole, but rather that the labor filling that hole isn't doing all that great of a job. Here's why, according to Yardeni and the St. Louis Fed.
The younger workers replacing Baby Boomers lack the human capital that their older counterparts bring to the table. The Baby Boomers, many of whom have been in the workforce for several decades, have institutional knowledge and years of skill accumulation under their belts. The replacements simply haven't had enough time on the job to be as productive as Boomers.
"The accumulation of human capital can be achieved in multiple ways. One is simply via experience: Older workers have more human capital, i.e., they know more just because they have done more and have experienced 'learning by doing.'
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"Another possibility is that workers go through periods of formal on-the-job training throughout their careers; so, they learn more as they grow older. Human capital is what makes a worker productive: The more human capital, the more output a worker produces in a day's work," the St. Louis Fed study stated, according to Yardeni.
Learn More, Earn More
As workers age, they learn more and, subsequently, should earn more. While human capital increases at its fastest rate early in a career, it doesn't reach a peak until much later on.
"While that's just a theoretical stylized portrait, the curve does tend to follow the typical earnings profile of a US worker, the author points out. 'This is because, in theory, workers are paid according to their productivity,'" Yardeni wrote.
Effect on GDP
If there are more young workers than there are older workers in the labor force, productivity would be expected to take a hit, Yardeni said. This is illustrated in GDP tracking against the age of the workforce.
"It shows an obvious inverse correlation-when these younger workers represented a greater share of the population, output was suppressed. If labor force composition can explain the productivity slowdown, then it can't really be fixed," Yardeni wrote.
It's worth noting that worker age isn't the only relevant factor when considering the effect of Baby Boomers' retiring en masse.
As Yardeni pointed out, technological innovation could play an important role in enhancing worker productivity and overcoming any slowdown resulting from Baby Boomer retirement. Just think of all the things that can be accomplished by scrolling on an Apple (AAPL) iPhone or searching on Twitter (TWTR) .
"Anecdotally, younger people also tend to be savvier with newer technologies and may be more apt to work alongside highly productive robots," Yardeni wrote. "So theoretically, the shape of productivity over a worker's lifetime might look very different in the near future than it has in the recent past."
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