Will the baby boomers cure unemployment?
Gerard Jackson
A student has asked if increasing retirement is a cure for unemployment. Well, the real cure for unemployment is free labour markets. Nevertheless, the question of whether unemployment will fall as more baby boomers retire has been raised a number of times
Ross Gittins, for example, predicted that as baby boomers retire unemployment will fall (Generation gap to create jobs turnaround, Sydney Morning Herald 4/4/01) and that this process should begin in 2002 and that labour shortages would emerge in about 2005 and then get worse as the number of people who retire exceed the number who enter the workforce.
This is basically a supply and demand situation. Fewer workers mean that the supply curve for most, if not all, workers will shift upwards and to the left. Widespread persistent unemployment will disappear and real wages will rise. The problem will then be one of labour shortages. Where will the labour come from to satisfy the demand of retirees? This is where the argument collapses.
The supply and demand element of Gittins' article was about the only thing he got right, though to be fair, he did say that his argument came from Population Ageing and the Economy, a paper produced for the Minister for Aged Care by Chris Richardson of Access Economics. So let us look at what Mr Richardson and Gittins had to say about the causes of unemployment.
According to Gittins "people of working age may not have jobs: because they're full-time students, because they're at home rearing children — or because they've retired before they turned 65." All of this is true. It's also totally irrelevant. What we are concerned with are not people who have voluntarily left the workforce but those who are able and willing to work but can't get jobs, though he did refer to unemployment and a shortage of work at the start of his article. This brings us to Richardson's fatuous view that "levels of unemployment through the 1980s and 1990s were partly explained by demography."
Gittins' statement about a "shortage of work" is just as fallacious as Richardson's assertion about demography and unemployment. I'll go so far as to call them economic absurdities. Economics tells us that so long as there is sufficient land and capital available and labour markets are allowed to clear there can be no such thing as persistent widespread unemployment, despite Keynesian fallacies to the contrary.
That Australia has more than sufficient land and capital to employ everyone is indisputable. It also follows from this that the idea that there is a shortage of work is ludicrous. How can such a situation exist while human wants are unsatisfied? To go any further on this matter would be to unnecessarily labour the point.
It becomes clear, then, that the problem is one of overpriced labour. As any competent economist would be inclined to say regarding persistent unemployment: Labour costs have been raised above their market clearing values. This argument is inadvertently supported by Richardson when he says "slowing down the labour supply will reduce underemployment".
The question of underemployment was also raised. But underemployment is merely another name for sub-optimal employment. This occurs where factors are driven into lines of production where the value of their output is less than in other lines of production from which they have been excluded. In other words, workers are underemployed when they have been priced out of jobs where their marginal product is more highly valued by the market.
What this amounts to is that as the labour force shrinks as the number of retirees begin to rise the unemployed and underemployed will start to fill their places. Of course, where retirees are highly skilled and few unemployed substitutes are available training schemes will have to implemented and perhaps supplemented by increased immigration.
Looked at in this light there is nothing special about this situation. On the contrary, once we apply economic reasoning to explain it we come to immediately understand the root cause of our unemployment problem.
However, there is another glaring fallacy in Gittins' article. He states that "[w]hen the demand for goods and services runs well ahead of the supply of workers available to produce them, you get wages being bid up as businesses try to pinch each other's employees, inflation taking off, profits being squeezed and an explosion in imports." This is sheer nonsense.
Recall that I said a reduction in the labour force leads to an upward and leftward shift in the supply curve of labour (I use labour figuratively because the reality is that labour is not homogeneous and there are only labour markets, not one single market) which means that the supply curve moves up the demand curve. Now the demand curve is no more than a descending schedule of labour's marginal productivities. Meaning that the value of employees' services are rising.
It should also be clear that the employers cannot pay more than the value of the worker's service. That he will be paid more is entirely due to being employed in higher valued lines of production. There is nothing inflationary about this.
(The situation in England after 1348 provides a graphic historical example of this process at work). The same process happens when capital accumulation exceeds the rate at which the workforce grows.
The bidding up process simply eliminates submarginal enterprises. The only way that prices could rise is that if output lagged behind the quantity of money. But this, as the Austrians point out, would be a goods, not money, induced change in purchasing power.
Now demand can never run ahead of output or labour services. The reason being that outputs are demands.
Put another way, supplies are demands. Goods, not money, pay for other goods. Money is merely an indirect way of bringing this exchange about. But what can run ahead of output is the money supply. This is what could cause prices to take off and imports to explode, not labour shortages.
What could very well happen, however, is that the labour force could fall so far behind the country's supply of capital and land (I mean land in the economic sense and not its geographic meaning) that per capita incomes could end up being smaller, i.e., suboptimal, than if the labour force was larger. A similar situation occurred in Germany during the '50s and '60s. The country accumulated capital so quickly that it had to import "guest workers". This is because capital and labour are complementary factors, a fact that leads us to another conclusion: The best way of raising real wages for everyone, and hence living standards, is to accumulate capital — not reduce the size of the workforce.
In any case, reducing the size of the labour force without adding to the capital structure will only raise real wage rates temporarily. Eventually real wages would fall as the effects of capital consumption made themselves felt.
Note: This subject certainly requires a more detailed treatment. For example, if an extreme situation arose where savings were very low or nonexistent and output was directed largely to consumption real wages and thus living standards would eventually fall.
Gerard Jackson is Brookes' Economics Editor
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