BOA: ‘Secular Graying’ Poses Huge Risk To Labor Market

BOA: ‘Secular Graying’ Poses Huge Risk To Labor Market

‘Secular graying’ isn’t a term that currently appears in many economic forecasts, but it is something investors should be keeping an eye om as it will have a major impact on the labor market and overall economy on according to analysts at Bank of America.

In a report issued by Bank of America this wee, the bank’ global economists Adltya Bhave and Ethan Harris discuss how ‘secular greying’ is turning out to be a headwind to trend growth across developed markets as the retirement of the baby boom generation and low birth rates in subsequent generations are slowing labor force growth.

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BOA: ‘Secular Graying’ Poses Huge Risk To Labor Market 

Most Western developed markets are grappling with the issue of changing demographics and its impact on the labor force, but so far, countries have been able to deal with the issue. Harris and team point out that that unemployment rates in the US, Japan, Germany and the UK are all near historic lows and these economies have “also experienced modest gains in labor force participation, which are particularly impressive given that demographics alone would predict a decline in participation.” For example, in Japan last year total employment rose by 1% while the working age population fell by 0.8%. The bank’s analysts speculate that this above trend growth has been the result of shrinking labor market slack rather than substantial productivity gains.

Across Europe, notably France, Italy, and Spain the picture is different. France and Spain have seen declines in labor force participation while overall unemployment remains elevated. This labor market slack, combined with scope for structural labor market reform means that demographics are not a particularly pressing concern in the near term for mainland European nations.

However, in the US the labor market is close to full capacity, and the Federal Reserve is tightening so demographic trends are a more pressing issue. Participation could rise further as “more discouraged workers and workers on disability return to the labor force. But these gains will be modest, and labor force growth should continue to slow towards its trend rate, about 0.5%, meaning that strong growth could lead to even tighter labor supply constraints.” This means policymakers are going to have to start paying special attention to demographic headwinds.

Labor supply constraints in the US, Japan and Germany, will weigh on economic growth and less productivity is dramatically improved. Analysis from Bank of America’s economics team suggests that trend growth could slow to 0.5% within ten years in Europe’s most productive economy, Germany. Japan meanwhile has more room for flexibility because the outlook for inflation in the region is still “dismal” and therefore the Bank of Japan can keep its focus on the accelerator. In the US and Europe, monetary policy deliberations will have to begin to focus on demographics.

Of course, one could try the German approach, but that does not appear to be working out too well.

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