Ageing Demographics and a Slowing Economy: The US Faces a Contradiction
The narrative around the US economy often fixates on the latest employment figures as the primary indicator of inflationary pressure. However, this view overlooks a deeper, more significant force at play: demographic change. While a tight labour market is traditionally seen as a driver of wage-led inflation, the reality of an ageing population suggests a different, more nuanced outcome. The US, like other advanced economies, is experiencing a fundamental shift in its workforce, and this structural trend is likely to result in lower inflation than many would assume. The contradiction lies in how a shrinking pool of workers, which should theoretically boost prices, is being offset by a decline in overall consumer demand as the population gets older.
This demographic weakness is becoming increasingly evident in the latest economic data. The most recent US labour market figures from July point to a greater slowdown than the headline suggests. Non-farm payrolls rose by just 73,000, and significant downward revisions of 258,000 to the May and June data reveal a much weaker underlying trend. While the unemployment rate stayed at 4.2 per cent, the broader picture is less positive. The labour force participation rate has fallen to 62.2% from a year ago, and the employment-population ratio is also lower. This indicates that a large number of people are leaving the workforce, a trend partly driven by an ageing population.
This cyclical weakness is unfolding against a deeper structural shift. Between 2000 and 2020, all net job growth in the US came from workers aged 60 and above, with younger cohorts seeing net losses. The retirement of the Baby Boomer generation, combined with low birth rates, means the working-age population is barely expanding. Congressional Budget Office projections show that without immigration, population decline could begin after 2033, making migration the only source of workforce growth.
The implications for inflation and demand are finely balanced. The supply-side view, rooted in the Phillips Curve, argues that a shrinking labour pool forces up wages, lifting prices. Labour-intensive sectors like healthcare are particularly exposed. However, the demand-side case points the other way. As the share of retirees rises, consumption growth slows. Japan's experience since the 1990s demonstrates how this can dominate: despite a dwindling workforce, wages have barely risen and inflation has stayed near zero. Similarly, China's rapid ageing is already weighing on consumption and contributing to disinflation.
In the US, the next few years will be shaped by these opposing forces. Labour scarcity is likely to keep unemployment low and support wages, but ageing will sap demand, flattening the relationship between employment and inflation. This will also affect productivity and keep the neutral real interest rate low, leaving central banks with less scope to cut rates in downturns. While immigration and flexible markets can temper these effects, slower growth, modest inflation, and persistent labour tightness are the likely outcome, challenging conventional economic models.
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