Study Finds the Aging of the U.S. Workforce Is Bad for Productivity

Companies need to get better at training older workers, concludes economist Mark Zandi.

The American workforce has aged, and the rate of U.S. productivity growth has slowed. It’s natural to wonder if there’s a link between the two phenomena. Economist Mark Zandi took a deep dive into the data and concluded that yes, alas, there is. “There is strong statistical evidence that the increasingly old workforce is an important factor behind the slowing in productivity growth over the past decade,” he wrote to me in a recent email.

I write “alas” because I’m closing in on 60 years old myself. Zandi is just a bit younger, born in 1959. So nothing you read here should be construed as throwing shade on baby boomers. Zandi, who is chief economist of Moody’s Analytics, presented his research in late July at an ADP Research Institute conference held at Nasdaq headquarters in New York’s Times Square. The session was closed to the press, but Zandi sent me his data later and explained his findings, which have not appeared elsewhere.

The policy implications are twofold, Zandi said: The U.S. should increase immigration to get more young workers, and companies should work harder at improving the productivity of older workers through training and re-education.

This chart shows that the share of American workers who are 65 and up has risen sharply since the beginning of the new millennium and is on track to keep rising for a couple more decades, simply because of population aging, not even figuring in an increase in the age group’s labor-force participation rate.



Meanwhile, labor-force productivity, which increased at an average 2.5 percent a year from World War II to the mid-2000s, has averaged just half that since then, and just 0.6 percent annually over the past five years.

That much everyone already knew. Probing deeper, Zandi and his team looked at government data from all 50 states and the District of Columbia, across 11 industry groups, and found that the pattern kept reappearing: Holding other factors constant, productivity was the lowest where the workforce was the oldest. That’s strong circumstantial evidence of a cause-and-effect relationship.

So far, Zandi’s results were consistent with the theory that older workers have “negative spillover effects” on the productivity in a workplace, possibly because companies do less overall training or don’t buy the latest software and machinery because they don’t think their older workers will be able to learn how to use it.

But there was another possibility. Maybe older workers have positive spillover effects on productivity because they share their store of specialized knowledge, and the problem is that they’re retiring in droves, which drives down companywide productivity. Zandi called this the “wise men” theory. He tested it by using data from ADP, which handles paychecks for 26 million American workers, with the identity of individual employees masked. He found that productivity tended to rise after older workers retired. “That kind of shoots a hole in the ‘wise man’ theory,” he says.

Zandi has one more test he’d like to do, which is to look at ADP data to see if, as he expects, companies experience gains in productivity when older workers switch to other employers rather than retire. But the evidence already accumulated is strong, he says. The aging of the workforce is going to weigh on productivity growth for at least the next 30 years, by his calculation. The slightly good news is that “the negative effects are probably at their worst right now,” Zandi says.



Kind of depressing. But Zandi doesn’t believe that demographics is destiny. Immigration could help, and so could training. “It’s very, very important for companies to really think about the training and re-education of older workers and how they can do that in a cost-effective way,” he says. “Some companies will figure out how and they’ll be the winners. Human resource departments need to start thinking about this more carefully.”

    Peter Coy
    Bloomberg Businessweek Columnist
    Peter Coy is the economics editor for Bloomberg Businessweek and covers a wide range of economic issues. He also holds the position of senior writer. Coy joined the magazine in December 1989 as telecommunications editor, then became technology editor in October 1992 and held that position until joining the economics staff. He came to BusinessWeek from the Associated Press in New York, where he had served as a business news writer since 1985.
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