Aging and the Productivity Puzzle

Research on the effect of an aging population on economic growth has tended to focus on labor force participation and the dependency ratio, and the limited work that has examined the effect of aging on productivity remains inconclusive. This analysis contributes to the aging and productivity literature and finds a strong negative effect of aging on productivity using both state-industry aggregate data and matched employer-employee microdata. The aggregate data show a clear relationship between an older workforce and lower productivity at the state-industry level, in both cross-section and panel models. The results are confirmed using employer-employee linked data from private sector human resource company ADP that show having older coworkers reduces an individual’s wages. Robustness tests include three-digit ZIP code geographic fixed effects and firm fixed effects for a sample of large nationwide firms. The results suggest that between a quarter and full percentage point of the slowing in annual productivity growth in recent years may be due to aging, an effect that is likely to persist for the next decade.