Demographic ageing is putting considerable pressure on the economic and social systems of industrialised countries. This column highlights that although the US is in a more favourable position than other OECD countries with respect to the expected future change in old-age dependency ratios, it is also characterised by large differences in labour market outcomes across population groups. In particular, disparities in labour force participation at the intersection of race/ethnicity and gender provide scope for policy aimed at reducing such gaps and thereby mitigating – or even offsetting – the effects of population ageing.
In recent years, the demographic shifts associated with ageing populations have raised significant economic concerns, particularly in industrialised countries. As the proportion of older individuals grows, the balance between the economically active and dependent segments of the population becomes increasingly strained. This poses substantial challenges for labour markets, social security systems, and overall economic stability. In the US, the old-age dependency ratio (i.e. the percentage of individuals aged 65 and over in relation to those at ages 20 to 64) was 30.4% in 2022 and is projected to rise to 40.4% by 2050 (OECD 2023). While this development is more favourable than in other advanced economies, such as Japan, Germany, or even China (where the rate is expected to increase from 19.4% to 47.5% in the same period), the US has considerable potential for improvement in several respects.
Labour force participation and inequality
First, activity rates have developed less favourably than in most other industrially advanced countries: OECD data show that, for the population aged 15 years or over, the US labour force participation rate (LFPR) declined markedly between 2000 and 2015 and recovered only partially thereafter, while the LFPRs of most other economically advanced countries increased steadily (OECD 2023). In 2022, in the 25 to 64 age group, the US LFPR was well below the average of industrialised countries and of EU countries (78.1% versus 81.9% and 81.2%, respectively).
Second, the US is characterised by large inequalities in labour market outcomes by population group. A number of studies have shown that there are large and persistent differences in employment and incomes between racial/ethnic groups, between genders, as well as between people with and without disability (Daly et al. 2020, Baumberg Geiger et al. 2019, Collins and Michael 2017). More recently, attention has increasingly turned to examining how race/ethnicity and gender intersect or interact to influence labour market outcomes (Autor et al. 2019, Chavez et al. 2022, Moen et al. 2022). Lower participation rates among certain groups not only reflect lost economic potential but also indicate deeper social inequalities. These include the fact that there are large disparities by education, race/ethnicity, or gender in health and longevity (Berger et al. 2022, Berkman and Truesdale 2022).
Since the 1990s, to address demographic imbalances, many countries have raised legal retirement ages and reduced the generosity of pension systems. Pension policies can contribute to securing the sustainability of social protection systems, but alone they will not prevent the decline in the relative size of the labour force in ageing societies (Geppert and Boulhol 2018). Policies that promote the labour force participation of the population, particularly of older people but also of women and other groups with lower activity rates, can make a substantial contribution to mitigating the effects of demographic change (Juhn and Potter 2006, Perez-Arce and Prados 2021).
Quantifying the potential effects of closing gaps on future labour supply
In a recent paper (Böheim et al. 2024), we project the future labour force in the US, taking the large inequalities between population groups into account. Studies on intersectionality emphasise that combinations of race and gender together shape social and economic identities and that these combinations create distinctive obstacles and opportunities (Browne and Misra 2003). For example, Hispanic men have LFPRs that are close to those of the majority non-Hispanic white population in most age groups. Hispanic women above the age of 25, however, have lower rates than the majority population and also most other minority groups. Intersectional disparities are also observable with respect to other labour market outcomes, for instance the Black–white income gap is entirely driven by differences in outcomes for men, not women (Porter et al. 2018).
Considering how different dimensions of stratification are intertwined is conducive to a more nuanced and accurate analysis of labour market dynamics (Moen et al. 2022, Paul et al. 2022). We contrast the effects of changes in important individual characteristics of labour force participation, i.e. education and health status, with the effect of changes in the participation propensities associated with these characteristics for different population groups by gender and race/ethnicity.
Our baseline scenario shows how the future size and composition of the US labour force would evolve over time under the demographic assumptions defined in the Census Bureau’s population projections, holding the impact of all influencing factors on labour force participation constant throughout the simulation period (2022 to 2060). To assess how policy reforms that address the disparities of labour force participation might affect participation in the coming decades, we select a series of ‘what if’ scenarios. The scenarios aim to quantify the potential of removing disparities between subgroups of the population, defined by gender and race/ethnicity.
According to these simulations (Figure 1), closing the gender gaps in LFPRs within ethno-racial groups could add 14.3 million people to the labour force. This substantial increase highlights the significant economic potential of greater female participation. On the other hand, when minority groups achieve participation rates comparable to non-Hispanic whites (the majority population group in the US), this could add approximately 6.5 million people to the labour force, emphasizing the economic benefits of reducing racial and ethnic disparities.
Figure 1 Change in labour force supply between 2022 and 2060, baseline and scenarios
Notes: Böheim et al. (2024), simulated values based on microWELT. The Baseline Scenario projects an increase of the labour force of 27.2 million persons by 2060.
Addressing disparities in educational attainment and health status between ethno-racial groups could add around 2.6 million workers, even without directly altering their participation propensities. This scenario underscores the importance of foundational social policies in enhancing labour force participation.
Finally, integrating the effects of both equalising participation rates between ethno-racial groups and improving their education and health could increase the labour force by 9 million workers compared to the baseline. This combined approach demonstrates the compounded benefits of comprehensive policy interventions. In relative terms, these scenarios add between 1.2% and 7.2% to the total labour supply in the US in 2060.
Figure 2 shows how the total number of people in the labour force as a share of the total population changes over time. The model projects that without intervention, the share of people in the labour force would deteriorate significantly. However, scenarios that close gender and racial/ethnic gaps show potential to not only mitigate but potentially reverse this trend. For instance, closing gender gaps – meaning that within each ethnic/racial group, women approach the LFPRs of men – could stabilise the dependency ratio in the transition phase (we converge rates over ten years) and even increase it when parity is reached, indicating an economically more favourable balance between the active and inactive population. Similarly, even without addressing the gender gap, removing racial/ethnic disparities and converging health and education outcomes can fully offset the effects of population ageing in the long run. Taken together, these disparities in labour force participation at the intersection of race/ethnicity and gender highlight the wide scope for policy action to mitigate the effects of population ageing.
Figure 2 Ratio between labour force and total population between 2022 and 2060
Notes: Böheim et al. (2024), simulated values based on microWELT.
Inclusive participation as a strategy against ageing
Our findings suggest that targeted policy measures to close gender and racial/ethnic gaps in labour force participation could significantly bolster the US labour market against the pressures of demographic aging. Policies aimed at increasing female participation, particularly by supporting working mothers through better childcare options and more equitable sharing of household responsibilities, emerge as particularly effective. Furthermore, addressing educational and health disparities is crucial. While these measures may take longer to manifest in increased participation rates, their long-term benefits are substantial. Improved health and education not only enhance labour market outcomes but also contribute to broader social equity and economic stability.
Inclusive labour force participation is of critical importance to mitigate the economic impacts of population ageing. By addressing the disparities at the intersection of race, ethnicity, and gender, the US can significantly enhance its labour force and maintain a more favourable economic dependency ratio. This requires a multi-faceted policy approach that not only promotes equality in participation rates but also improves the underlying conditions of health and education across all population groups.
Overall, our research confirms that “demography is not destiny” (Kotschy and Bloom 2023) and that, while demographic ageing presents significant challenges, these can be effectively managed through strategic and inclusive policy interventions. The potential benefits of such measures are clear: a more robust labour force, greater economic stability, and a more equitable society.
Source : VOXeu
