Population Aging and Productivity
If there’s one key message in this post, it’s that population aging is already impacting societies and economies around the world, and its effects will be magnified if they’re not addressed.
Much like climate change, the effects of population aging unfold slowly, so societies tend to delay their responses. A Pew Research survey across 40 countries found only a median of 51 percent of people surveyed say that climate change is already affecting people (hint: it is!) and a median of 54 percent feel climate change will be a “serious problem” (hint: “serious” may be an understatement).
If our response to population aging is anything like our response to climate change, we are in trouble.
As people grow older and exit the labor force, reducing the human capital active in a national economy, productivity growth must account for an increasing share of GDP growth. On a worldwide basis, the McKinsey Global Institute estimates that productivity growth would have to increase to 3.3 percent annually to offset the decline in the growth of the labor force, but this productivity acceleration is by no means an easy task given that over the last 50 years, productivity has risen at a compound annual rate of 1.8 percent.
Technological advances could help supplement a declining labor force and boost productivity in certain sectors, but aren’t likely to be a panacea.
A recent working paper from the National Bureau of Economic Research finds that population aging in the United States will trim GDP growth by 1.2 percent annually between 2010 and 2020 compared to GDP performance with current population structures. This is a substantial dent, considering that GDP has expanded about 2 percent annually over the last four decades.
In Asia, the Asia Productivity Organization reports that the growth slowdown in South Korea’s working population curbed the nation’s GDP expansion between the 1980s and the 1990s. In the next five years, South Korea’s working-age population is set to decline in absolute terms. Economic growth could diminish to 1.4 percent annually between 2040 and 2050 at current fertility levels (1.2 children per woman) without significant productivity gains.
Japan’s aging labor force contributed to the nation’s low productivity growth of less than 2 percent annually for the last two decades, according to the McKinsey Global Institute. For Japan to see GDP growth advance to 3 percent moving forward, it would need to double productivity growth. Unfortunately, the weak productivity gains of recent years will make it more difficult to counteract the economic effects of its aging population.
What happens when growth slows on account of a shrinking labor force and declining productivity growth? Aggregate demand contracts along with output, and population aging will have an impact. Lower output could suppress wages, job creation, and business expansion. Delayed expansion reduces borrowing, depressing credit markets, and investment opportunities dwindle. The knock-on effects reverberate throughout the economy.
At the same time, the double burden of a smaller labor force and larger elderly population will decrease overall tax revenue and limit the government’s fiscal flexibility. Public expenditures may shift away from growth-stimulating investment in education, business development, and infrastructure toward pensions, health care, and social welfare to support older adults.
The solution, however, could be hiding in plain sight. The growing cohort of older adults offers skills, knowledge, and business opportunities that could plug these gaps, mitigating the broad effects of labor shortages. Tapping into this longevity dividend will require public and private institutions to build enabling environments that would extend the social and professional activities of many millions of people. Such transformation is already occurring around the world.
For a more extensive discussion of these issues, see the Milken Institute report “Redefining Traditional Notions of Aging: Embracing Longevity Across Cultures.” In Part 2 of this blog series, I will dive deeper into programs and initiatives that are contributing to solutions.