Aging and Economies

JIM MCNIVEN 
July, 2014 

It’s really pretty simple. In order for a society to reproduce itself, each woman must have 2.1 children during her fertile period, which normally lasts from, say 14-42 years of age, more or less. This is called a fertility rate, as opposed to a birthrate. A stable population fertility rate is reached by counting one for mommy’s replacement, one for daddy’s replacement and 0.1 for misfortunes. Canada, as a whole, has bounced around 1.4-1.6 for over 40 years, since the early 1970s. In other words, Canadian couples have produced 2 kids for every 3 we need to maintain our population. Today, any growth in the country’s population is due to immigration — period.

Something similar is going on elsewhere, with Japan having experienced this situation since the late 1950s. All kinds of people have blamed its two ‘lost decades’ on ‘zombie banks’ or other factors, but my own conclusion, after looking at their labour force numbers since 1990, is that they have done well to just keep growth flat. But, we’ll come back to that later. We could also look at Russia, where the population is declining or nearly so (not including conquests like Crimea), China, where the ‘one-child’ policy is decades old, and much of the EU, where Canada-like birthrates are the norm.

There are global exceptions. Half the world is urban now, and urban birth rates are around 2.1, including emerging nations’ cities. Poor, rural countries like Somalia have numbers like 6 or 7. The US is the big outlier, with fertility rates around the 2.1 number for the past forty years. Some of this difference from other rich countries is religious in origin, some due to heavy Latino immigration, and some to other cultural factors. On the whole though, the world is moving towards the 2.1 figure and, since there are no off-world sources of immigration that we know about, in the second half of this century population will level off and start to decline.

Economic growth models presume population increases. What if the population declines?

This may be taken as good news, but it is not without qualifiers, and these are what I want to discuss. You see, our understanding of economies and economic growth has an interesting assumption that almost no one has had cause to really think about. This is the assumption that increases in GDP over time presume increases in population. What if the population declines, however? This gets serious.

We need to break the population into two parts to understand what the problem is. These two parts are the population of workforce age and the part that is not. This latter includes children and old people. Everybody else is in the former. The problem lies in whether the workforce group is growing or declining. Today, the ‘baby boom’ generation, born when fertility rates were 2.5-3.5, is sliding into retirement, with the oldest being 68 this year and the Canadian average retirement age being 62. This group is numerically larger than the groups who were born in the 1970s+ generation when fertility first dipped to 1.4-1.6.

Now, keep in mind that as people retire, most live on, in Canada, for instance, for 18-20 more years. There are two sets of intertwined problems: a declining workforce creates one set, but then later on, a declining population creates a second set. These policy problems are not substitutes, but are additive. Let’s start with the workforce group.

Whether the subject is Canada, Germany or Japan, the same dynamics apply: eventually, a declining employed workforce would lead first to those still unemployed being absorbed, then groups of people who normally would not seek work because of culture, discrimination or disability would be recruited as far as politically possible, after which a point would be reached where the pressure from a continuing decline would cause growth to stop. Shortly thereafter, as the workforce continues to shrink, economic shrinkage would begin, following the constraint of available labor.

Solutions are obvious, but difficult. More people must be found and put into the employed workforce, such as child labour and/or retiree labour, or productivity would have to rise faster than the number of employed declines, or the economy can do nothing except stagnate or shrink. None of this is rocket science and these basics have been known for a long, long time.

Suppose, for example, we were to apply this idea to actual policy choices made by Japan for the period 1990-2014. Japan is the ‘oldest’ rich society in the world and a good indicator of where Canada, western Europe and others are heading. A quick look at Japan in this context seems to indicate the following:

  • New entrants to the workforce. Japan has rejected any significant immigration. It has perhaps 1-2 per cent of its labour force as immigrants, where the US is about 12 per cent and Switzerland 18 per cent.
  • Changes to the participation rate. Japan has rejected any significant increase in its low participation rate for women. Male participation was already at very high levels. Recently, Prime Minister Abe said that in 2015, 30 per cent of new civil service hires (only) will be women, a generation after the overall workforce topped out.
  • Productivity increases. Japanese productivity is very high in the manufacturing sector, but not in the commercial, service and primary industries, especially agriculture. Combining these sector productivities shows productivity growth as being stable over the period since the early 1990s. This combination is not unlike the Yukon miner whose feet were almost in his fireplace and his head was out the cabin door in the sub-zero cold. On average, not too bad.

Given its demographics, Japan’s labor force should have peaked in the period 1988-90, before declining, and its population should have begun to decline by 2009. The economy should have entered a period of stagnation in the 1990s, turning to outright decline in or about 2005, and should have been declining ever since. But this has not quite been the case. The economy bounced around, with a recession in the early 1990s, some growth in the middle of the next decade and then a number of years where there was stagnation. Unemployment did not disappear, though the rate was generally very low. It was also heavily concentrated among women and youth. Needless to say, another explanation was in order.

Attracting senior labor back to work is a ‘low-hanging fruit’ in the quest to put off the inevitable need for more fundamental changes in society.

Through a process of elimination, the answer seems to lie in the male participation rate. Analyzing the data for the size of the labor force from 1987-2008, it appeared that it grew through 1996, though at a very slow rate. Then it leveled off through 2007, declining only marginally toward the end of the period. Since the labor force numbers should have started to shrink shortly after 1996, something had to have changed for them to be flat for over a decade. What happened was that since 1996, the proportion of men 65-69 in the Japanese labor force grew rapidly. With official retirement in the larger corporations being around 60, real retirement had to be moving toward 70 for a large number of men. By 2007, this group of employed/retired senior males made up over 8 per cent of the Japanese labour force. Attracting senior labor back to work is a ‘low-hanging fruit’ in the quest to put off the inevitable need for more fundamental changes in society. Canada is following suit. Senior employment trends in the demographically oldest Canadian provinces, such as New Brunswick and Nova Scotia, appear to be trending in a direction similar to those in 1990s Japan. It is rising especially amongst senior women, which is definitely un-Japanese, but not surprising.

The only serious piece I have read on the topic of what may happen in an economy with a declining population is a translation of a 2004 Japanese book, Shrinking-Population Economics, by Akihiko Matsustani. There have been other people who have noted that a declining population would be a good thing relative to human pressure on the environment, public health, and the ability to feed ourselves. Others have done research on the problems of declining cities like Detroit or Buffalo, or rural regions in many countries, but these are seen as population shifts, somewhat like ghost towns around played-out mines, only bigger in terms of numbers of people or regional size. There are financially-oriented pieces that point to the need for wealthy countries with declining populations to export their savings and live off the returns from economic development in the emerging economies.

Matsustani, however, takes a whole country as his starting point. His diagnosis is perhaps stronger than his prescriptions, but it is still a solid piece, if largely ignored. One of his central ideas is that an economy with a declining population is one with chronic deflation. He points out that investments are made in the present world economy on the premise that they will generate a return to the investors over time. Yet, can there be a return in building a new retail outlet or domestic manufacturing plant if there are less customers in the future than today? If you meet the demand for widgets today, what will you do when the demand declines year after year into the future? Cut prices? That’s deflation, if it applies to all the industries in a country. Raise wages, as Mr. Abe is trying to engineer? That puts more pressure on the corporate bottom line or, if done in the public sector, on the budget. Exports? When most of the developed countries will begin this long slide after 2020 — remember that Japan is but the pioneer — import demand will likely be sliding almost everywhere.

Now, to repeat myself, there are 3 factors, which if manipulated well, can help any country avoid this problem. The first is to have more people. Unfortunately, birth rates are tangled up in all kinds of cultural and economic rationales. They are the proximate cause of the problem, but the obverse is no real solution, given where we are now. It takes 20 years or more to transform a baby into a worker, though child labour laws may shift on this. Canada, like some countries, has opted for immigration as a partial solution, but the gap between replacement workers and acceptable immigration levels has become too large to be filled. Keep in mind that an immigration policy based only on admission of workforce age applicants is likely not practical, definitely not humane. Grandmas and babies are immigrants too.

A second way is to employ a greater proportion of the declining number of people of workforce age. We saw that the Japanese have gone to the elderly population to achieve some delay in the impact of the problem. Canada is doing this already and so probably are other countries. The main motivation for seniors looking for employment in both of these countries has been crappy pensions. Of course, lowering the workforce age is a corollary to this and labour-short Albertans have flirted with lowering the age to 12, while high school completion rates have taken a hit from their hot economy.

A third way is to raise productivity, to produce more with less people. Canada is not known for being a hotbed of productivity, outside the highly automated oil and gas industries. Will we see the 2-employee Tim Hortons or McDonalds backed up with a lot of automation? Can we get past the notion that productivity is bad — a job-killer? Will 3-D printing save us?

Every developed country except the United States is sliding gently and quietly into a condition that we know almost nothing about. In global academia, U.S. research interests tend to dictate, implicitly or explicitly, priorities over what gets studied and popularized elsewhere. This population problem is not an American problem, so it is likely that little policy attention will be paid to it until the struggle to maintain at least a flat economy is upon a lot of the rest of the world.

Copyright © 2014 James D. McNiven

Contact: j.mcniven AT dal.ca

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