The first part – last week – concerned the extensive but also “dramatic” changes in demographics, depending on the identification – based on economic indicators – of countries.
Advanced economies often struggle to implement economic reforms that adversely affect older voters and costly social security regimes, while developing ones may struggle to integrate a growing working-age population into their labor force. While overall population levels in advanced economies may not decline thanks to immigration, the elderly population will continue to grow relative to the working-age population. This emerging “grey majority”, however politically diverse, is interested in defending spending on pensions and health care and opposes reforming the social security regime with the goal of cost savings. This raises medium and long-term challenges for public finances.
As a result, governments face difficult choices about whether to raise taxes, cut spending, or accept a larger budget deficit to increase debt, which could jeopardize economic and financial stability by slowing economic growth. Meanwhile, rapidly demographically expanding societies also face significant economic challenges in integrating an expanding working-age population into the economy. As these countries are often very poor, governments struggle to provide education and infrastructure to support strong, sustainable economic growth and facilitate the integration of young people into the economy. This so-called “youth bulge” often makes countries more prone to domestic political violence and instability, further weighing on economic growth, foreign investment and supply chain integration.
Rapidly aging societies face significant economic challenges, including slowing growth and increasing fiscal pressures. To estimate how quickly a population is aging, demographers often use the “elderly dependency ratio,” which compares the number of people aged 65 and over to the number of working-age people between 16-65. As this rate increases, the public deficit and public debt also tend to increase, since older people typically consume more than they produce in terms of income. This, in turn, typically forces governments to spend more on pensions and health care for the elderly, which in turn heightens political tensions over how resources are allocated and to whom, also known as distributive conflict.
To overcome labor shortages and combat population decline, governments of rapidly aging countries may seek to add more people to their labor force and/or increase the productivity of their existing (labor force). The economies of countries facing demographic challenges are not doomed. In fact, in most cases, a 1-1.5% increase in labor productivity should be enough to offset the drag created by an aging workforce – which can be achieved in a number of ways.
Liberal immigration policies, for example, can help fill jobs by attracting foreign labor, but they also often lead to internal political tensions and polarization. Third, where women’s labor force participation rates are low, policies that help women integrate into the labor market, such as subsidized childcare, can help. However, the availability of this option is somewhat limited in countries with high female labor force participation rates.
Governments can also implement policies aimed at keeping older people in the workforce for longer through disincentives (such as raising the retirement age) and/or incentives (such as offering more flexible work arrangements), which may not not only to help slow down the effects of the declining working-age population, but also to relieve the immediate pressure on the social security system and public finances. But such policies also carry the risk of backlash, not least because of the increasingly large and influential “grey majorities” of countries facing demographic decline.
Given the downsides of these various policies, measures that seek to make today’s workforce more productive, as well as policies that encourage people to retire later, are perhaps the most promising. In particular, investment in technological innovation – such as Artificial Intelligence and automation – could offset the negative effects of job cuts.
While low-income countries are in a more favorable demographic position compared to high-income countries, they still face challenges related to high unemployment, political instability and internal conflicts. Many low-income countries are currently experiencing declining fertility rates while their working-age population continues to expand, meaning that their labor force is growing relative to its dependent (young and old) population. If properly managed, this phenomenon (commonly known as the “demographic dividend”) can lead to faster economic growth.
An expanding working-age population means more labor is available, while a falling dependency ratio makes it easier to generate higher savings, provided the government follows the right macroeconomic policies. However, low-income countries often cannot benefit from the demographic dividend due to structural constraints, including inadequate education systems that leave young workers without the skills required to add much in terms of productivity growth;
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