Boomer retirements likely to blunt the next recession

The next downturn won’t look like the last one. For one thing, labor force demographics were a drag on economic growth last time, but they should help minimize economic weakness this time.

The key factor when thinking about the interaction between labor force demographics and the economic cycle is the role played by the baby boomer generation — because of their sheer numbers. The population bulge of people born between the early 1940s and the early 1960s is visible both in population data and in the labor force data. Because people tend to act differently at different phases of life, as the boomers have passed through their working years they have distorted the economy.

Baby boomers acted as a drag on the economy in the aftermath of the great recession because it occurred during the peak saving years of the generation. Saving rates tend to be higher for older workers because older workers have higher incomes than younger workers do, they’re more focused on saving for their approaching retirements than younger workers, and because the bulk of their spending on raising families may be behind them. When the bulk of the growth of the labor market is occurring because more older workers are working longer, as it has been for the past decade, this acts as a relative drag on economic growth overall because these older workers are saving for retirement rather than demand-generating activities like buying houses and raising families.

After the great recession, some referred to the 2000s as a lost decade for employment because there was very little net job growth during that decade. For younger workers things have been much bleaker: From April 2000 until today there has been essentially no net growth of employment for workers under age 55. Over that same time, employment for workers over age 55 has doubled. That’s how much of an impact the aging of the baby boomer generation has had.

But this is about to change. Perhaps as soon as this year, employment of people over the age of 55 should peak, after which it would decline for the next 15 years. We know this because the same pattern has played out for every other age bracket that baby boomers have passed through.

This matters because a mild labor market downturn, or a multi-year period without much net job growth, may not feel like much of a downturn at all if it’s happening during a time when the number of older workers is shrinking.