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Older Now--and Steadier

With the U.S. apparently in a recession, economists are still unraveling an enduring mystery from the unprecedented expansion of the 1990s. How could the unemployment rate fall from 7.5% in 1992 to 4% in 2000 without triggering the surge in inflation that many of the nation's economists expected?

As with so many other trends that have marked the U.S. economy since World War II, the answer may lie in the aging of baby boomers, suggests one recent study. In the October issue of The Regional Economist from the Federal Reserve Bank of St. Louis, Abbigail J. Chiodo and Michael T. Owyang observe that the labor force grew much more elderly in the 1990s. The share of workers 35 and older rose from less than 54% of the labor force in 1990 to almost 62% today, a level not seen since the mid-'60s (chart).

The study found that the aging labor force accounted for half of the eight-year drop in unemployment, since workers over 35 typically have a rate of unemployment only half that of younger workers. The study cites earlier research by Robert J. Shimer of Princeton University to explain the impact on unemployment and inflation. Shimer argued that older workers were more skilled and more likely to be matched with jobs where they were productive, thus holding down inflation. By contrast, younger workers are more prone to moving in and out of jobs in search of a career that suits them, which shows up as higher unemployment.

The St. Louis study also found that improving technology helped keep low unemployment from rekindling inflation by increasing worker productivity. But who knows whether technology can continue to play that role? The age composition of the labor force for the next few years is about as predictable as economic variables get, and Labor Dept. projections show the 35-and-over group rising to almost 63% of the total in 2008. That suggests that the next expansion will benefit from the same anti-inflation influences as the previous one. Opponents of supplementing Social Security with private retirement accounts argue that such an arrangement would hurt the poor. They claim that poor retirees, with no investment experience, would be more apt to lose money in the stock market. But a new study by Jagadeesh J. Gokhale, senior economic adviser at the Federal Reserve Bank of Cleveland, says that individual accounts could actually help low-income families by making it easier for them to accumulate financial assets.

Gokhale says that low-income people find it hard to save because so much of their pay goes toward Social Security taxes--and they don't see the need to save for retirement because Social Security benefits will cover most of their retirement needs. As a result, he says, they don't accumulate wealth.

The Fed researcher created two computer simulations of the U.S. economy: one with Social Security and one without it. He found that, under the current system, a child who grows up in a family with few financial assets--defined as having less than $99,000 in cash, life insurance, and stocks--has a 40% likelihood of retiring with little in the way of assets. But if Social Security were replaced with individual accounts, calculates Gokhale, the person's probability of retiring with less than $99,000 in assets would fall to 16%. The likelihood of retiring with $245,000 to $455,000 in assets would nearly triple, to 28%, and the chance of amassing more than $455,000 would more than double, to 11%. (All sums are in 1995 dollars to remove the effect of inflation.)

Gokhale thinks the rich, too, would do pretty well with individual accounts. In his simulations, people who grew up in the top rung ($455,000 and up) have a 74% chance of retiring with at least that much money under a system of individual accounts, compared with only a 46% chance under the status quo. In the first decades after World War II, economists believed that poor nations blessed with mineral resources should focus on developing them. Yet a new study shows that countries that depend on commodity exports, such as oil, have higher poverty rates and worse health conditions than nations with more diverse economies that have similar per-capita incomes.

Oil-rich Nigeria, for example, has a child malnutrition rate of 38%, compared with a worldwide average of 27%, notes Michael Ross, assistant professor of political science at the University of California at Los Angeles, who wrote the study on behalf of Oxfam America, an antipoverty group. Similar figures are evident in U.N. data--not part of Ross's study--that show that heavy dependence on "primary exports"--oil, minerals, and food--is correlated with higher mortality for children under 5 (table).

Ross says that exports of oil and minerals don't benefit the poor because the profits go mainly to skilled workers in the extractive industries and to government officials. The study, building on research by Jeffrey D. Sachs and Andrew M. Warner of Harvard University, says the World Bank should push countries to diversify exports, improve the living conditions of the poor, and behave democratically. He says nations that are at least partly democratic--such as Botswana, Chile, and Malaysia--have "successfully used resource revenues to alleviate poverty."

Ross's study was released in anticipation of the Oct. 29 launch of the World Bank's review of its activities in mining and drilling. The World Bank will issue its review findings next June.

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