Demography Strikes Again

I have said before that demography rules. It creates long-term immutabilities that cannot be changed in the short term. The entire global workforce in 2035 has already been born. We cannot add to it, unless we adopt policies that allow 8-year-olds to work. It can shrink because of war or epidemic, for example, but it is not going to get any bigger. I have ranted about this in past columns, but on March 1, I had the opportunity to address it more formally when I spoke to the National Association of Business Economics (NABE). This column is a shortened version of those remarks.

Population growth is not evenly distributed around the globe. That has led to two very different problems—countries with declining population growth and an aging population, and countries that are growing rapidly and have more young people than their economies can absorb. In a stateless, apolitical world, the solution to both problems is simple. The surplus young workers would move to the labor-deficit countries, restoring planetary equilibrium. Sadly, that is not the world we live in. It is true that global economic integration is moving faster than political integration, but not that fast.

So, countries are left to wrestle with the implications of demographic change. For the sake of brevity, I will focus only on those with declining populations. For them, fertility rates continue to decrease, life expectancy rises, and the population ages. As this occurs, the economically active part of the population declines, which leads to reduced productivity and declining economic growth.

  • While productivity initially increases with an aging workforce, that effect declines once workers have reached their peak productivity in their 40’s.
  • Shrinking and aging populations lead to an increase in spending on social security and pension programs. As economic output slows, governments increasingly rely on debt to pay for increases in health and pension-related spending. In more developed economies, the International Monetary Fund (IMF) predicts pension and health-related spending will increase from an average of 16 percent of a country’s GDP (2015) to 21 percent (2050). That will lead to either reduced spending on other priorities or an increased debt-to-GDP ratio, both of which lead to a variety of bad consequences.
  • A 2014 IMF Working Paper found that aging populations can also cause deflation through changes in nominal wages caused by a declining labor force participation rate and lower spending on land/housing by an older population, among other factors.

Let's look at three examples.

Japan is the poster child for population decline. The current population of 127 million is expected to decline by 15 percent and fall below 109 million by 2050, according to the 2017 UN World Population Prospects. Population predictions from Japan’s Bureau of Statistics are even more pessimistic, predicting a 25 percent decline by 2050, which means the population would fall below 100 million, while the share of Japanese age 65+ would increase from 28 percent (2018) to 39 percent (2050).

It is estimated that Japan needs to take in 650,000 foreign workers every year if it wants to keep its population above 100 million. However, Japan has never been an immigration country, and such a significant change in its system is unlikely. Instead, the government has proposed a series of palliatives such as raising the retirement age, introducing more women into the labor force, and building robots. None of these are expected to reverse the downward trend, although they may insulate the population from some of the effects.

Data Source: estimates based on the UN’s World Population Prospects via populationpyramid.net

A somewhat different example is Germany, which, until recently, faced a similar gloomy forecast of population decline with the ratio of workers to retired people expected to decrease from the current 3:1 to 1.6:1 by 2060. The German government responded with family-friendly policies such as guaranteeing the right to daycare, maternity pay, and child support, which has boosted the fertility rate to 1.5 in 2016, the highest since the 1970s, but still well below the replacement rate.

The real impact in Germany has come from migration, which increased (net) from 130,000 in 2010 to 430,000 in 2013 to a peak of 1.1 million in 2015. Since then it has settled at a level of 400-500,000, well above previous levels. As the chart shows, this has produced a revised forecast for Germany.

Data Sources: Statistisches Bundesamt, 13th coordinated Population Projection for Germany; Institute der deutschen Wirtschaft Köln’s, Bevölkerungsentwicklung in den deutschen Bundesländern bis 2035

In the United States, our fertility rate hovers around the break-even point; our population continues to increase, albeit at a slower rate; but we do face the aging time bomb.

  • The total U.S. population is expected to increase from 326 million (2017) to 404 million (2060). By 2035, for the first time, more people will be over the age of 65 (78 million or 21.3 percent) than under 18 (76.7 million or 20.9 percent).
  • The United States has so far avoided the negative impacts of an aging population, mostly thanks to immigration; population growth will slow down from an average yearly increase of 2.3 million to 1.5 million. By 2040, immigration will account for over two-thirds of the population growth.

Source: U.S. Census Bureau, Driving Population Growth: Projected Number of People Added to U.S. Population by Natural Increase and Net International Migration

That, of course, assumes the continuation of our historical policies, which are currently under challenge by the Trump administration. The fact that we appear to have more jobs available than there are people to fill them, validated by the growing number of employers complaining they can't find workers, suggests that a restrictive immigration policy on the part of the United States could be a significant impediment to economic growth.

The United States has tapped into the reservoir of immigrant workers for more than 200 years, and it is one of the main reasons for our economic success. The people that have come here have not only been good workers, but they’ve also been—and produced—good artists, musicians, writers, athletes, innovators, and even politicians. We are stronger and richer economically and culturally because of them, although there are clearly many who do not appreciate that.

These examples illustrate the long-term nature of the problem. It has taken a long time for countries to get to where they are, and it will take them a long time to work through their problems and get to where they want to go. That, in turn, makes it hard to be definitive about which policies work and which do not. I will, however, offer a few hypotheses.

First, while there are things a government can do to offset the effects of declining population, many of them are palliatives that do not change underlying demographic realities.

Second, policies that can promote population growth, such as financial incentives to have more children, work at the margin and, at best, take a long time to have an impact.

Third, the policy that will have the biggest short-term impact is immigration; yet it is the most controversial. For example, the recent wave of migrants into Europe presents countries with declining populations an opportunity to put themselves back on the path of growth without waiting for a generation of babies to grow up. It is a win-win strategy. It is also socially disruptive. A country is not the same after an immigration wave. So far, it does not look like many EU countries want to seize the opportunity, which is understandable in light of controversies that have arisen.

The United States has historically been more successful at tapping into immigration because it recognizes that it is an immigration country, and, until recently, has had a relatively liberal immigration system, offering pathways to work authorizations, permanent residence, and citizenship to skilled immigrants. In other words, immigration may be controversial, but there are ways to do it right.

A special thanks to Madeleine Waddoups and Jonas Heering for research support on this week’s column.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Jonas Heering is an intern with the CSIS Scholl Chair.

Subscribe to William Reinsch's Weekly Column

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2019 by the Center for Strategic and International Studies. All rights reserved.