Assessing the impact of demographic composition on productivity

We examine how demographic factors influence potential output, focusing on how the age distribution of the working-age population and the old-age dependency ratio affect aggregate productivity. Following Feyrer (2007), we emphasize that the contribution to aggregate productivity varies by age group, with middle-aged individuals (aged 40 to 49) being the most productive. Our analysis shows that changes in demographic composition could explain some of the productivity trends observed in China and the United States over the past few decades. This demonstrates why it is important to incorporate the impact of demographic composition when estimating potential output. In particular, demographic factors are expected to narrow the differential in trend labour productivity (TLP) growth between China and the United States by nearly 1 percentage point between 2024 and 2030. On average, TLP growth in China could be reduced by 0.8 percentage points, while that in the United States could rise by 0.1 percentage point. Moreover, demographic factors in Canada portray a similar story to that of the United States. After averaging about 1 percentage point per year from 2010 to 2019, demographic headwinds are expected to dissipate fully through the 2020s, which could signal an upside risk to Canadian TLP growth.