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Capital Comments: A Simple View of the Economy Helps Us Understand Growth

Let’s think about the economy in the simplest possible way. People use tools to make goods and services, which other people buy. Gross domestic product is our measure of the value of goods and services. It grew 2.5 percent above inflation in 2023. We can use the simple view of the economy to figure out why GDP grew this much, and what will make it grow in the future. 

Ask two questions: How many people are working, and how good are their tools? If there are more working people with better skills, with more and better tools, the output of goods and services will increase.   

Start with people, the population of the United States. Kids aren’t allowed to work, so we’ll count only the people 16 years old or older. There were about 267 million people 16 or over in 2023, outside of institutions and not in the military. These are the people who could be working.

This measure of population grew 1.1 percent in 2023. Part was net natural increase. We added people born 16 years before, in 2007, and lost people who passed away in 2023. Fertility is down, as women have fewer children, so the natural increase was small. Most of the increase in U.S. population came from immigration, which has rebounded since the pandemic. Population growth last year was the highest since 2015 because of immigration.

Most of this population is in the labor force. Not counted are retired people, full-time students, and, unfortunately, homemakers. We know that people who raise children and keep house are doing valuable work, but mostly not for a paycheck. That means there’s no paper trail, so the number-crunchers can’t include their services in GDP.

There were 167 million people in the labor force in 2023, which is 62.6 percent of the population. That’s the labor force participation rate.

The rate began falling when boomers started to retire in the 2000s. The pandemic reduced it some more. It’s since recovered almost back to its 2019 level. Here, we need the percent change in the percent. The labor force participation rate grew 0.6 percent from 2022 to 2023. 

Most people in the labor force are working, but some are searching for work. We call them unemployed. In 2023 there were 161 million people employed and 6 million unemployed. The unemployment rate is the percentage of the labor force who are unemployed, 3.6 percent. It’s useful here to use the “employment rate,” 96.4 percent in 2023.   

The employment rate was unchanged last year. We’ve learned that 3.6 percent is about as low as the unemployment rate can go. Even when there’s no recession, there are always some

unemployed people, because it takes time for employers and employees to find each other, and some of the job searchers have skills that don’t match the needs of the open jobs. 

How much do the employed people produce? That depends on their skills, and on the number and quality of their equipment—their tools. Jackhammers and wind turbines, tractor-trailers and office furniture, and computers, computers, and more computers are tools we use to produce GDP. The average employee produced $139,000 dollars of GDP in 2023, a 0.8 percent rise from 2022. Call this productivity growth.

Productivity growth tends to vary with recessions and recoveries, but the 2023 increase was about the same as the average annual increase during the long expansion of 2011 to 2019. 

Add them up. Population grew 1.1 percent, labor force participation grew 0.6 percent; the employment rate didn’t change, and productivity rose 0.8 percent. That’s 2.5 percent, which was real GDP growth in 2023.

What about the future? New technologies should add to productivity growth. Let’s be optimistic about technology—more Star Trek, less Skynet! The employment rate is about as high as it can go. If there’s a recession it will fall, and that would subtract from growth. Boomer retirement is likely to flatten labor force participation, or even reduce it, as happened in the 20-teens. Fertility was falling back in the double-0’s, so the natural increase in population will remain low.

That means future growth depends mostly on three things – new technologies to spur productivity, avoiding a recession, and continued immigration. 



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