For fear of chucking rocks in glass houses (ca half of Alphaville is on the wrong side of 40), here is an NBER working paper to back up our headline (which is just a blunt version of the “demographics is destiny” cliché).
Alphaville’s emphasis below:
Population growth and age structure change dramatically as countries transition from high to low rates of mortality and fertility. These changes present an opportunity for societies to substantially raise living standards. Initially, mortality declines faster than fertility, producing a bulge of young dependents that tends to depress economic growth.
However, once fertility decline accelerates and this bulge of young people progresses into working ages, economic growth can take off. The growing ratio of working-age people in the total population raises labor input; promotes productivity; and frees resources for saving, educational attainment, and innovation. Bloom et al. (2003) label this growth take-off the demographic dividend. Countries harness it if they create a socioeconomic environment that beneficially employs their labor potential. The dividend dissipates once countries complete the demographic transition.
However, as fertility remains below long-run replacement rates in many countries and large cohorts progress to older ages, population age structures fail to stabilize in the foreseeable future. This threatens to turn the demographic dividend into a demographic drag.
This is obviously not a new idea, but the paper — authored by Rainer Kotschy and David Bloom of Harvard and published by the National Bureau if Economic Research this week — tries to put some meat on the bone of that last point.
They first examined the demographics and economic growth rates of 145 countries in five-year intervals between 1950 and 2015, and used those observations to estimate the impact of ageing populations over the next three decades.
Kotschy and Bloom used two methods. One was a simple, traditional “retrospective” model which uses existing uniform classifications of old age across generations. They also used a “prospective” approach, to take into account that people today are mentally and physically able to work for longer than they were before.
In other words, a 60 year old in 1950 (who had lived through two world wars, a depression, the Spanish flu, and generally a lot of unpleasantness) was less likely to live as long and be able to work as long as a 60 year old today. And thus:
We combine the empirical estimates with demographic predictions and project economic growth in 2020—2050. These projections show that future growth depends not only on how population age structures change as cohorts pass through the age distribution but also on how labor potential changes with improvements in functional capacity as longevity rises. Contractions in working-age shares will slow growth; however, gains in functional capacity thanks to higher life expectancy can cushion perhaps half of this slowdown. Without population aging, income per capita in OECD countries is projected to grow on average by 2.5 percent annually between 2020 and 2050. With population aging, growth is projected to slow by 0.8 percentage points if we measure work in gages retrospectively but only by 0.4 percentage points if we measure working ages prospectively. These values define bounds for the average demographic drag across OECD countries with and without the potential gains from expansions in labor supply due to improved functional capacities. Whether or not these gains can be realized depends on labor markets and institutions. In contrast, population aging is projected to spur average growth of income per capita in non-OECD countries.
Those may seem like small growth differences, but compounded over three decades the impact is meaningful.
Going by the OECD’s $38,341 per-capita GDP in 2020 and extrapolating the no-ageing, retrospective and prospective scenarios, Alphaville’s very rough calculations show that the rich world will be $8,900 worse off per capita by 2050 than we would be if demographics stayed constant, even with the more optimistic prospective model.
Or in chart form:
It’s a Monday in August so take this with a pinch of salt, but Alphaville’s back-of-the-envelope calculations indicate that the OECD’s overall gross domestic product will be at least $12tn smaller in 2050 in the prospective scenario, and $23tn smaller in the gloomier retrospective one.
On a completely unrelated note, here is an old Calvin & Hobbes strip.
Source: Economy - ft.com
