Tag Archives: demographics

Demographic cliff ahead

In many countries the working-age population now constitutes the highest share seen in decades. That will not be the case in the upcoming years. The European “peak workforce” that this blog has discussed earlier is not unique for Swedes, Germans, and Italians. In fact, in most of the world’s richest countries, the dependency ratio (the number of people younger than 15 and older than 64 per person in working age) has been shrinking for the past half century. More people have, relatively speaking, had to provide for fewer people. Until now. As the graph shows,  the dependency ratios will now start to increase, and do so substantially over the coming five decades.

demographic cliff 3

These 42 countries are the member states of either G20 or/and OECD (the EU is excluded from G20 because it is not a country). Between 1960 and 2010, only three of these states (Japan, Sweden and Germany) experienced a growing dependency ratio. In economic-demographic terms those decades were thus on average favorable. In thirty-nine countries the working-age population grew faster than the number of children and seniors. Between 2010 and 2060, in sharp contrast, only two countries (India and South Africa) are expected to face declining dependency ratios. This is related to the fact that both India’s and South Africa’s populations are predicted to continue to grow in the coming decades. The remaining forty countries are likely to have to deal with severe demographic troubles.

This expected demographic pattern is worrisome for several reasons. While increasing longevity is inherently a good thing, it will increase the pressure on pension schemes and healthcare systems. An increasing dependency ratio means that unless employment is increased – through a higher statutory retirement age, sooner average entry on the labor market, or other measures – fewer will have to provide for more. Will this be the end to social security as we know it?

Another troubling outlook is debt. Greece, Italy, Portugal, Ireland, Spain, France, United Kingdom, Canada, and United States all piled up their debt while the dependency ratio in each country was falling, and population on average was growing. How that debt should be repaid n0w that fertility rates slow down, and the dependency ratios are set to increase is a question that is equally mind-boggling as it is alarming.

There is a demographic cliff ahead. Are we going to jump or at least try to climb down?

Simon Hedlin

Longevity dilemma

Economic growth is not the only important growth issue. Another type of growth that should be discussed more often is the elderly-dependency growth; the fact that the number of seniors per potential worker is growing. Much like economic growth rates, the elderly-dependency growth rates vary greatly across countries. The economic impact and consequences for social security and budget deficits will also look different in one country from another. What they all have in common, however, is that neither has ever had to deal with the demographic problems of the magnitude that is expected.

for whom the growth tolls

Simon Hedlin

Are shrinking populations only good news?

From Thomas Malthus to Paul Ehrlich and thereafter many predictions have been made regarding the effects of population growth. Malthus thought that people would be kept at subsistence level, and that productivity gains would result in population growth until the economy converged again to subsistence level. In The Population Bomb published in 1968, Ehrlich argued that overpopulation would lead to mass starvation.

What we see today is a different story. Productivity gains have made obesity a bigger problem than hunger in many countries. And almost everywhere, fertility rates are falling. Some countries do even experience negative population growth. From an environmental perspective this is likely to be good news. Fewer people, holding everything else constant, implies less pollution and less extraction levels of our planet’s scarce resources. A shrinking population does, however, lead to a few economic dilemmas.

One is debt. As The Economist’s Buttonwood columnist Philip Coggan points out:

First, debt is easier to service if your nominal income is rising, but nominal income growth has been very sluggish in [countries such as] Japan. Second, debt does not decline as the population falls; so the debt per capita rises, making individuals even more cautious. You are not going to go on a spending spree if you have high debts already and you are worried how you will afford retirement.

Another economic problem is the effects that the changing population structure has on social security. Having a pension system where today’s workers pay for today’s retirees has worked during times of a growing economy and an increasing population. But when growth rates in many countries are slowing down and the number of workers shrink relative to the number of retirees, the pyramid turns upside-down. Indeed, as has been discussed before in Buttonwood’s notebook, and on this blog, the projected changes in dependency ratios are striking. The next post will attempt to illustrate this problem graphically.

Simon Hedlin

O Brothers, Where Art Ye? Young men are leaving the US labour force

Following April’s jobs report, there has been much discussion about America’s declining labour force participation rate. Brad DeLong, for instance, writes:

Given the current state of the employment-to-population ratio, we would predict that the current labor-force participation rate would be 1.5% points below its natural rate. That gives us a predicted labor-force participation rate today of 64.3%-64.7%. Instead, our labor-force participation rate is 63.6%.

That is a gap of 0.7%-1.1% points of the adult population: people who really ought to be in the labor force right now, but who are not.

Evan Soltas breaks down the numbers of the decline according to various factors, including gender. And as many people, for instance Mark J. Perry, have noted, the decline in the labour force participation rate is partly due to the fact that men are leaving the labour market.

Mike Konczal quotes Ben Bernanke saying that we are “no longer getting increased participation from women /…/ society ages and also, for other reasons, male participation has been declining over time.”

Catherine Rampell reaches the same conclusion:

The main reason the labor force has been declining in the last couple of decades, then, is that men have been dropping out in droves.

Rampell has posted two interesting graphs, where the first shows the labour force participation rate among adults aged 25-54, and the second shows the long-term trend of men aged 25-54 leaving the labour market.

The following figures take off where her second graph ends, focusing on the differences for men in various age groups:

This chart shows foremost two things: 1) the labour force participation rate varies widely between the age groups, and 2) the only age group for which we find a large decline is men aged 15-24.

If we draw another graph using 1990 as an index year, the second point becomes clearer:

So for two age groups, the labour force participation rates among men have actually increased over time, for two other groups they have – in relative terms – decreased a little, and for the youngest men it has declined severely compared with 1990. Here it is also interesting to note the clear positive relationship between age and change in labour force participation rate.

But what about the youth? Pete Seeger’s old lyrics do indeed come in handy here: “Where have all the young men gone?”

(Feel free to use all figures in this post as you wish.)

Simon Hedlin

Peak workforce: How should Europe afford the future? Part 1

It is popular to talk about peaks, such as peak oil – the point in time when the maximum rate of global petroleum extraction is reached. But there is one important peak that there has been surprisingly little discussion about. That is peak workforce.

Demography has profound effects on the economy. As The Economist’s Buttonwood columnist importantly points out, a smaller workforce in absolute numbers will make the huge nominal government debts of today much harder to repay. Sluggish nominal GDP growth due to a diminishing labour force will not reduce nominal debt.

And as this blog argued the other day, the ratio of the total population who are in working-age, and thus capable to work, affects the possibility to provide for those who cannot or do not work.

Based on historical data for the past six decades years and based on projected data for the next six decades in Europe, it turns out that we, at the moment, seem to live in the best time of our lives, with respect to these demographic parameters.

Europe will not in the future see a workforce as large as the one today, and we are set to see a diminishing share of the population who are in working-age. If the projections are correct, the smaller labour force could have severe negative effects for all the European countries that are now heavily indebted. As stated, fewer people in working-age do not bode well for nominal GDP growth. Furthermore, the projected decrease in the share of the total population who are in working-age implies that, in the coming decades, the people who do work will have to work longer or more productively to provide for the growing share of people who do not work.

These demographic dilemmas pose a very relevant question: How should Europe afford the future?

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson

Demographic challenge ahead

After being inspired by a blog post by The Economist’s Buttonwood correspondent, I drew the following graph.

One picture raises more questions than a thousand words:

(Feel free to use this figure for your own purposes, but please do not forget to mention the source, which is this blog.)

Simon Hedlin Larsson