Why Maine’s demographics might not be of great economic concern

FROM Scott Thistle’s recent article, Maine’s lack of population growth source of economic concern:

State lawmakers heard again Monday that Maine’s dwindling and aging population will continue to be one of the biggest factors in the state’s long-struggling economy.

. . .

But the state’s economy is still largely hinged on its ability to grow its population.

. . .

State Rep. Peggy Rotundo, D-Lewiston, the House chairwoman of the Appropriations Committee, said that policymakers need to take seriously the state’s demographic challenges. She also said the state needs to begin an earnest discussion about what can be done to attract immigrants to Maine.

Rotundo said several other states, facing similar demographic challenges as Maine, have developed policies and programs aimed at recruiting immigrants to grow the population and the workforce.

Maine’s population shift has been argued as causing stagnant job and economic growth, as the following graph suggests:

The arguments being made about Maine’s demographics shifts and stagnant economy imply a positive correlation between population and GDP–that is, increasing the population will increase GDP (the standard measure of economic growth).  However, that correlation is not so concrete.

For starters, GDP might be the wrong metric to use when measuring the health of an economy, particularly when discussing the correlation between economic growth and demographics.  The problem is aggregate GDP, that is, the total economic output of an economy, is not be the best measure of well-being, as a Guardian piece from earlier this year highlights in a discussion regarding the UK’s economy:

Britain has recovered little of the ground lost during the deep recession of 2008-09 once a rising population is taken into account, the Office for National Statisticshas said.

. . . 

The ONS said: “Given that it measures aggregate activity in the economy, GDP, supported by other information, inevitably and correctly plays a central role in discussion about monetary and fiscal policy and about the state of the economy generally. It is therefore of vital importance.”

But it added: “At the same time, GDP has long known weaknesses as a measure of economic welfare or wellbeing.”

 For example, let’s assume a population of 10 people, which has an economy producing $100 worth of economic output a year.  That’s a per capita GDP of $10.  Now, let’s assume the population doubles to 20, but the economy grows by only 50% to $150.  The result is a per capita GDP of $7.50.  While the population and eocnomy, the economic well-being of the population fell by some 25%.  That’s the problem facing the UK, and the problem with the presumed positive correlation between economic growth and demographics.

To get another perspective on this, let’s look at Japan, which has been struggling with a stagnating population for several years.  Using the aggregate GDP figure suggests that Japan’s economy is suffering.  However, controlling for population changes and looking at the per capita GDP figure reveals an economy that has outperformed the U.S., U.K., and other western nations.  To go back to our simple model from above.  Assume the population decreases to 8, and the economy contracts by 15% to $85.  Per capita GDP has increased to $10.62.

So, what about the correlation between population growth and per capita GDP? According to Hatta Tatsuo of the Asian Growth Research Institute, the correlation is still weak (my emphasis):

There certainly are a lot of people who say that. But the rate of population does not affect the growth rate of per capita GDP. Here’s a scatter diagram (Graph A) for the OECD (Organisation for Economic Co-operation and Development) member countries over the last forty years showing the average growth rate of GDP per person and the average growth rate of population.  This reveals that and there’s absolutely no correlation between the two. For example, in Mexico, where the average annual growth rate of population was whopping 2%, the annual growth rate for the GDP per capita was only 2%. There is even a country with a negative population growth rate having a growth rate of per-capita GDP at more than 5%.

Graph A: Growth of Per Capita GDP and Population

Graph A: Growth of Per Capita GDP and Population


As for data a little closer to home on the topic.  Last year, Jose Lobe published a brief report with the Martin Prosperity Institute examining the correlation between GDP and population in the U.S.  Specifically, he looked at the correlation between the growth rates of the two for each U.S. metro area from 2001 – 2011, and concluded:

Population growth is often seen as a way for cities and regions to succeed as with an increase in population, the economy, tax base and other things will grow. It is also often believed that with an increase in GDP, a region or place will then attract a greater population. What this Insight demonstrates is that in fact, there is no direct correlation between population and GDP growth within the U.S. metros. The success and growth of regions is not solely determined on population or GDP, as many factors, such as quality of place, talent, tech-nology, and tolerance, are shaping our complex cities.

This does not mean that demographics does not play a role in economic growth–either in the aggregate or per capita.  Rather it means that human capital (population/labor) is just one input of total output (yes, the other inputs–capital and productivity–will need to pick up the slack), and that population declines and shifts do not per se mean economic calamity.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.