The year 1973 is widely recognized as a turning point in the US economy. Two dramatic differences between the twenty year period before and after that date are the movement of average real wages of American workers and aggregate economic growth as measured by GDP. In the post 1973 era, real wages have fallen rather steadily, reversing a pattern of growth in the earlier period, and GDP growth has slowed appreciably. How can we explain the slowdown in economic growth?

There has been a long history of interest among economists in population growth. In fact it was the writings of Thomas Malthus, an early economist, which was responsible for Economics being labeled the dismal science. His view that population would continue to grow geometrically (see present value analysis) while food would grow arithmetically - the result being that people would continue to live at a subsistence level.

In recent years there has been renewed interest in the subject as a result of rather rapid population expansion in the developing world. Unfortunately, the leaders of the world's countries have not been able to reach an agreement on the issue of population control. In recent years there have been international conferences on Population and the Environment, but these conferences ended with little in the way of agreement on population or environmental control. What we can do is look at the relationship between economic and population growth.

A Decomposition of growth to highlight population

Let us begin by assuming that the level of national output (Q) is equal to the average output per worker (Q/L) times the number of workers (L).

Let's now specify that the number of workers equals the labor force participation rate (percentage of the population in the workforce) times the size of the population (P).

If we add these two equations together we get:

With a little algebra we can convert this equation specifying the multiplicative relationship between level variables (output, labor, and population) to an additive relationship between percentage change variables. Using some rudimentary math, the growth in GDP (q) can be decomposed into three separate factors- labor force participation rate growth (l/p), population growth (p), and labor productivity growth (q/l).

• q = growth rate of output
• p = growth rate in population
• l = growth rate in labor force
• (q/l) = growth rate in labor productivity
• (l/p) = growth rate in labor force participation

What do we have in equation 4? We can begin by rewriting it so that we are explaining the growth rate in output per person (q-p) as:

With this specification we can see that the the growth in output per capita, a commonly accepted measure of the standard of living, originates from two sources-what I will call intensive and extensive growth. Extensive growth is growth that happens because of an expansion in resources, close to what Paul Krugman suggested was the source of growth in Southeast Asia in the post WWII era. In this model extensive growth would take place if the labor force participation rate increased [(l-p)>0], if the labor force was growing more rapidly than the underlying population. Intensive growth, meanwhile, takes place when resources are utilized more efficiently, if there is an increase in labor productivity [(q-l)>0].

There is a significant difference between the two sources of growth. The primary difference, and the one that is a concern for the US, is that there are limits to extensive growth. While it may be possible to raise labor force participation rates over the short-term, it is not sustainable. There is a limit to the percentage of the population that can be working and as we approach the limit, this growth will disappear. Intensive growth, meanwhile, can continue on indefinitely. There are no limits to growth that originates in greater productivity of resources.

The track record for the US is presented in the table below. As you can see, the composition of growth changed sharply after 1973. Prior to 1973 approximately 90 percent of per capita income growth was due to intensive growth, but in the period starting in 1973, approximately two-thirds of growth was extensive. What we are really seeing here is that the movement of females and baby boomers into the work force.

Back