Bridge over ocean
1 November 2013 CFA Institute Journal Review

Net Gains and Losses (Digest Summary)

  1. Natalie Schoon

With Baby Boomers beginning to retire, the size of the workforce in many developed countries is shrinking. Significant productivity increases will be required to generate economic growth and to pay for the Baby Boomers’ retirement.

How Is This Article Useful to Practitioners?

Although the labor productivity indices are generally up, growth has been sluggish. In the eurozone, for example, productivity was up just 13% since 1995 and only 3% since 2005. In the United States, GDP per hour has grown by only 0.3% a year since 2010, compared with an average of 1.15% a year in the 20 years previous.

The author speculates that the low performance is the result of, in part, a change in the structure of the workforce. In Britain, around 40% of the increase in employment is attributable to self-employed workers. The self-employed tend to work harder but get paid significantly less for their efforts. In addition, the author notes that self-employed workers are typically not the entrepreneurial type but are more often freelancers.

The role of technology in enhancing productivity appears to have played a smaller role than originally expected. But a lower cost of capital and significantly improved profits should encourage companies to go on an investment spree. And as long as they start investing sooner rather than later, there is still a good chance the economic growth will be big enough to pay for the Baby Boomers’ retirement.

Abstractor’s Viewpoint

Retiring Baby Boomers have for some time now been a concern for developed economies. It is interesting to look at the change in the structure of the workforce as a cause for lower overall performance of labor productivity, particularly when it results in lower cost for companies. But as long as economic forecasts remain as they are, companies may be reluctant to invest some of their profits, thus potentially creating a vicious circle.

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