A First-Principles Look at Historically Low U.S. Fertility and its Macroeconomic Implications
Recently, the CDC released provisional data showing that, in 2023, the U.S. birth rate declined to its lowest level in history. This data point is the most recent in a trend of falling U.S. fertility rates since 2007, the onset of the Great Recession. Observers have noted that low fertility—and the aging population that it generates—implies fewer workers per capita and creates significant headwinds to economic growth, the fiscal sustainability of public benefit programs, and the trend of continuous improvements in living standards, as reflected in per capita incomes.[1] This story of demographic pressure is directionally correct, but leaves out other important forces shaping the macroeconomic future. In this issue brief, we return to first principles to better understand how declining fertility and an aging population will affect the U.S. fiscal future and living standards, highlighting how growth in labor force participation and labor productivity can be countervailing forces that mitigate the impact of an aging population.
We also highlight the types of policy necessary to meet these challenges, policies that the Biden-Harris Administration has already been working to implement. The arithmetic that ties economic outcomes to fertility trends reveals two forces that can help offset the challenges of an aging population: building out the care economy and supporting faster productivity growth.
Living Standards Depend on Per Capita Output
Living standards—the material circumstances of the average person—depend on output per capita.[2] This is the level of production and consumption available in the economy, adjusted for the size of the population. A simple accounting exercise linking output per capita, as a proxy for living standards, to workers in the population can be written as follows:
Output per capita = output per worker * workers per capita
This identity shows that output per capita can change either because of changes in output per worker or because of changes in workers per capita. An aging population implies that a smaller share of the population will be of working age, which, all else equal, means declining workers per capita. This fact is the foundation of concern in the U.S. and other nations about the fiscal challenges and headwinds to economic growth associated with an aging population.
The old age dependency ratio—defined here as the number of people aged 65 and older for every 100 people aged 25 to 64—is a useful summary measure that is closely related to workers per capita. A ratio of 50 would mean there were half as many people aged 65 and older as there were 25- to 64-year-olds; a dependency ratio of 100 would mean an equally-sized population of both age groups. Figure 1 plots the old age dependency ratio for the United States, the OECD, and the world overall. This ratio has been increasing since the mid-twentieth century and is projected to continue to increase through the remainder of the twenty-first century. In the U.S., the dependency ratio has risen 97 percent between 1950 and 2021, and is projected to rise an additional 102 percent from 2022 through the end of the century.
Although the dependency ratio can be used as a helpful proxy for workers per capita, the workers per capita term differs in one important way. The dependency ratio captures all people in an age range, not just workers. If we further decompose workers per capita into two distinct parts, the original identity reads:
Output per capita = output per worker * workers per working age people * working age people per capita
The first term on the right-hand side of this identity (output per worker) is a measure of labor productivity. The second term (workers per working age people) is an employment to population ratio. The third term (working age people per capita) is closely related to the dependency ratio as shown above. Thus, the extent of the fiscal challenge posed by the old age dependency ratio depends not only on the share of working age people but also on their decisions to participate in the labor force and how productive they are once they enter. In the remainder of this issue brief, we discuss how growth in labor force participation and labor productivity can be countervailing forces that mitigate the impact of a rise in the dependency ratio (i.e., a declining working age people per capita).
The Care Economy is Critical for Supporting Labor Force Participation
Because labor force participation partially determines the relationship between the population age structure and workers per capita, policies that relax constraints to entering or participating fully in the labor force are especially important. Accessing dependent care is an example of one particularly severe constraint to labor force participation: The cost of child care is up over 30% in the last decade and more than 200% over the past 30 years. For older adults and people with disabilities, long-term care costs are up 40% over the past decade. For some workers, it may be more affordable to leave the workforce and take on care burdens themselves than to pay for child or elder care.[3] Many other workers don’t even get this choice: The Center for American Progress estimates that 50 percent of families live in child care deserts: areas that do not have enough child care supply to meet demand.
The Biden-Harris Administration has invested historic federal funding into the care economy since taking office. The American Rescue Plan (ARP) delivered $39 billion in child care relief funds and $37 billion to expand and strengthen home and community-based care services. The President’s most recent budget includes proposals to reduce the cost of child care so that most families would pay no more than $10 per day, saving the average family $600 per child per month, and would invest in free, voluntary, universal preschool for all four-year-olds.
Such measures to better address care could increase labor force participation, especially among women. Despite reaching a historically high female labor force participation rate (LFPR) in April 2024, LFPR among women still significantly lags that of men: Among prime-age women, LFPR in April 2024 was 78 percent compared with men’s 89 percent. Additionally, LFPRs among mothers of young children have historically lagged that of mothers of older children and women as a whole. These sizable gaps indicate significant room for further LFPR growth among women and mothers of young children: growth that could significantly increase the workers per potential worker term. Researchers have offered the relative lack of family-friendly policies—such as paid leave and accessible child care—as one reason that U.S. women’s labor force participation has lagged compared to OECD peer countries. Figure 2 shows that, among men and women between the ages of 18 and 54 in the U.S. with and without minor children, women with children under the age of 18 remain significantly less likely to be employed than their male counterparts. Among men and women with no care responsibilities, men and women are roughly equally likely to be employed.
The Role of Productivity Growth
Alongside increases in labor force participation, growth in labor productivity also mitigates the fiscal strains and economic drag of an aging population. Labor productivity is measured by the economic output generated for each hour worked, and directly relates to the term output per worker in the identity above. It grows over time with human capital improvements (especially via education), labor-augmenting physical capital, and technological progress, making society wealthier per capita. The Biden-Harris Administration has supported continued long-run productivity growth through investments in accessible education and training programs. The American Rescue Plan allocated significant federal funding to early care and education ($39 billion), K-12 education ($122 billion), and higher education ($40 billion). There is also significant evidence that reducing childhood poverty, including through the President’s enhanced Child Tax Credit in 2021, improves children’s long-term educational outcomes. Alongside these investments, the Administration’s ongoing rulemaking aims to expand registered apprenticeships and introduces a new income-driven repayment plan that makes college more affordable. Beyond education, the Administration is investing in physical capital and improving failing infrastructure around the country through actions such as the Bipartisan Infrastructure Law, the CHIPS and Science Act, and the Inflation Reduction Act.
Because rising dependency ratios are not a new trend, the history of labor productivity growth versus changes in the dependency ratio can be instructive. In particular, if productivity growth outpaces dependency ratio growth, then income per capita (living standards) need not decline even as workers per capita falls.[4] Figure 3 plots these against each other since 1970. Over 50 years, even as the dependency ratio has risen by 45 percent, U.S. living standards, as reflected in per capita incomes, have risen as productivity growth has outpaced aging. Going forward, population projections suggest an annualized increase in the U.S. dependency ratio of nearly 1 percent through the end of the century. Even productivity growth that would be anomalously low by historical standards would dramatically outpace this. For example, average productivity growth since 1970 has been 1.9 percent and the Bureau of Labor Statistics projects that labor productivity growth will be 1.7 percent from 2020 to 2030.
Low U.S. fertility combined with an aging population have the potential to generate significant headwinds to economic growth. But these challenges are a continuation of long-run U.S. trends, not a new crisis. The experience of other OECD countries—who have been weathering these challenges for longer—can be instructive. In addition to comprehensive supports such as enhancing the efficiency of health care provision, other OECD countries have relied on immigration to grow the labor force and contribute to fiscal sustainability in the face of an aging population. Canada, for example, has seen enormous success in its merit-based migration system, which can help to meet specific labor market needs, which in the U.S. will include growing demand for workers in the long-term care industry. Smart policy choices with respect to supporting labor force participation and even modest continuing labor productivity growth mean that these challenges need not threaten fiscal sustainability or continuing improvements in U.S. living standards.
[1] A separate but related issue is the sustainability of government debt. Because slowing (or negative) population growth implies slowing GDP growth, it places downward pressure of the margin between the economic growth rate and the nominal interest rate, and therefore upward pressure on the debt-to-GDP ratio.
[2] Note that this discussion ignores distributional issues. If, due to structural inequality, output disproportionately flows to the wealthiest households, the living standards benefits will of course also be skewed to the top.
[3] The large increase in the old age dependency ratio, and its implications for demands on working-age people to participate in care, is not counterbalanced by a falling child dependency ratio of a similar magnitude. The number of people 0-19 for each 100 people 20-64 is projected to decrease only moderately from 2024 to 2100, from 41 to 37 (10%).
[4] Even so, a doubling of labor productivity would not imply that the tax revenue associated with a single worker could support twice as many seniors. As explained in the 2024 Economic Report of the President, that is in part because the real costs to maintain quality of life for seniors also increase over time. In general, Americans want per capita incomes to rise over time, with each generation left better off than the last.
