Stockholm (Ekonamik) – Higher per capita income implies better access to housing, education, healthcare and other pleasures in life, which, in turn, tend to lead to improved health and higher life expectancy. The population aged 65 and older has been growing faster than all other age groups, whereas the global birth rate has been decreasing since the second half of the 20th century. The economic expansion post-World War II has certainly improved living standards and led to higher life longevity, but does the increase in life expectancy have a positive effect on economic growth?
With the population aged 65 and older growing, hundreds of millions of workers expected to retire over the next couple of decades and not quite so many taking their place in the workforce, economic performance will likely suffer due to the rising social security burden and the shrinking workforce. Danish-born Niels Jensen, who founded London-based investment advisory Absolute Return Partners, argues that “such a massive wave of retirements will affect everything, not only because the global workforce will downsize, but also because servicing the elderly will become increasingly expensive in the years to come”. According to Jensen, “an obvious consequence of a shrinking workforce is slowing GDP growth”.
Because of stagnating, or even shrinking, labour forces in many of the world’s largest economies combined with only modest productivity growth, Jensen foresees a bleak picture of low structural economic growth for the decades to come. To explain his expectations, Jensen puts forward one of the most fundamental equations in economic theory:
∆GDP = ∆Workforce + ∆Productivity
“At the most fundamental level, there are only two drivers of economic growth: workforce growth and productivity growth”, explains Jensen. The formula above implies that “if one knows how much the workforce will shrink in the years to come, one also knows how much productivity will need to improve for the country in question to deliver positive GDP growth”.
Looking back at the United States from the mid-1950s to the mid-2000s, workforce growth contributed on average at least one percentage point to annual GDP growth. “In the ten years from 2007 to 2016, however, workforce growth contributed less to GDP growth than it did at any time in the previous 50 years”, says Jensen, who emphasizes that the workforce “will shrink much further in the years to come”. Between now and 2050, Jensen expects workforce growth in the US to contribute only 0.25 percent annually to US GDP growth. Even worse, of all 35 OECD member countries, the United States is the least affected by this trend.
“Workforce growth is, as just established, one of the two key drivers of economic growth”, points out Jensen. “It is largely a function of the age-wise composition of the population at large, and the key number is the growth of the 20-65-year-olds”. The median age varies dramatically from country to country and from continent to continent. Africa’s median age is only 18 years, whereas Europe is the oldest continent with a median age of 42 years. “Some countries will be much more affected by this trend than others”, argues Jensen.
The five oldest countries in the world are all European, apart from Japan. Slovenia, Italy, Germany, Japan and Monaco all have median ages above 44.5 years. Excluding Monaco, the oldest country in the world is Japan. Three of the five oldest countries are in the G7, with Germany, Japan and Italy collectively accounting for over 12 percent of global output. By 2050, each of those three countries is expected to have median ages above 50. The youngest countries, on the other hand, are all African.
“The practical implication of all of this is that countries will be affected very differently by ageing”, explains Jensen. “Whereas some (mostly OECD) countries will struggle to deliver positive trendline GDP growth at all, other countries will only be modestly affected by ageing”, he adds. “A small number of countries – mostly African – will actually benefit from ageing, as the local workforce will grow rapidly”.
Factors Driving Workforce Trends
Even though society is getting older and ageing populations are bad for economic growth, governments can play a role in building a deeper and younger pool of workers, fuelling economic growth. “Lawmakers can affect workforce growth by making law changes that affect (a) the retirement age, (b) female participation in the workforce, and (c) migration”. If all these three factors remain largely unchanged going forward, the workforces in both Japan and the European Union will decline significantly between now and 2050. “In reality, none of the three factors will remain constant, so there is definitely a bit of wiggle room”, points out Jensen, “but I would stress that the wiggle room is quite limited”.
Growth in the workforce can be secured by increasing the retirement age, so should we change it? According to Jensen, “if people were to retire later in life, not only would pension plans’ funding deficit fall, but GDP growth would most likely accelerate”. Jensen sees two caveats if the retirement age is increased. “Firstly, governments will face massive resistance as they move forward with plans like these”, points out Jensen. The transport strikes that crippled Paris throughout much of December and January represent some evidence of the difficulty to implement pension reforms.
Secondly, there is also evidence that older workers tend to be less productive. “Older workers are not as productive as their younger peers are”, says Jensen. “Extending work life may therefore not have as big an impact on GDP growth as one would expect”. That said, the physical demands on workers today “are far less stringent than they were a generation or two ago”, acknowledges Jensen. At least in theory, “the average worker should be able to work a few years more” than previous generations did, but “this is only happening to a very limited extent in practice, mostly in the United States”, Jensen adds.
Workforce growth can also be achieved with higher female participation in the workforce, so should we encourage more women to join the workforce? According to the United Nations, which provides regular updates on female-to-male participation rates globally, “female participation began to gather momentum in developed countries in the 1980s and the trend continues to this day”. However, the countries with the highest female participation exhibit a female-to-male participation ratio of about 90 percent. Data from United Nations suggest that that the ratio begins to flatten out, once this level has been reached, so “one should not expect it to increase much beyond 90”, says Jensen.
“Reducing, or entirely eliminating, the gender gap would probably encourage more women to join the workforce,” argues Jensen. “As skilled labour increasingly becomes a commodity in demand, I am pretty sure that will happen,” he continues. However, “higher female participation is a drop in the ocean in most developed countries when compared to the number of people who will retire from the workforce over the next few decades,” emphasizes Jensen.
Last but not least, should more migrants be allowed to settle in those developed countries that experience a shrinking workforce? “One of the less admirable aspects of human behaviour these days is the growing sense of nationalism, and with that follows populism,” reckons Jensen. “With a growing sense of nationalism, and populists increasingly coming into power around the world, I would assign near zero percent probability that immigration begins to rise in the OECD anytime soon,” he argues. “The voters simply won’t allow that to happen.”
Everyone wants economic growth, but we also want to live longer, and the two objectives do not always go hand in hand. Growing the economy makes people richer, and the wealthier lead happier, healthier and longer lives. That said, rising longevity is a liability on society. Not only are younger workers more productive than their older peers, but the growing cohort of elderly is a massive liability on society. “The NHS in the UK reckon that they spend 6-7 times more on a man in his 80s than they do on a man in his 30s”, according to Jensen.
He adds that “the world is ageing at a rapid pace. Between now and 2050, the number of people aged 60+ will almost double as a share of the total, and the 80+ age group will grow even faster”. An ageing workforce can hit the global economy in many different ways. Even so, the world’s economic machine is not broken; it is just running a little slower than it did a while ago, perhaps significantly slower, because workers are not as young as they were.