The Economics of Graying Populations

Holding back the tide of time: how to deal with the economic challenges of aging populations

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Demography, the study of populations, always carries the undercurrent of economic power dynamics. India stealing China’s thunder as the most populous country on the planet has coincided with (or perhaps fuelled) Indian President Narendra Modi’s push to rival China as the world’s factory floor. For most countries, however, population growth is no longer a given — in fact it’s quite the opposite.

Governments are fretting more openly about their aging populations. Japanese Prime Minister Fumio Kishida said earlier this year that the country is “standing on the verge of whether we can continue to function as a society.”

Today, we’re going to dig into the economics of aging populations — how urgent of a problem do they pose, and what can nations do to allay the problems that come with an increasingly graying population.

So let’s stop wasting time and dig deeper. After all, none of us are getting any younger.

The “Double Whammy”

There are two big factors pushing the world’s average age higher: 

  • Longer life expectancy, which is due largely to medical advances. The global life expectancy of a human is now 73, compared to 46 in 1950.
  • Lower birth rates, which often correlate to higher levels of education of girls. In 1950, the average global fertility rate was five births per woman, by 2021 that had fallen to 2.3 births per woman.

Professor Nicholas Barr, an economist at the London School of Economics, told The Daily Upside that although not every country’s population is aging at the same rate, aging populations are a global trend. “You’ve got a double whammy, and that’s a trend in almost all countries,” Barr said, although he added it’s particularly pronounced in Japan and South Korea.

As the proportion of people above the typical pension age rises, it squeezes the economic productivity of the segment of the population that’s still working. So how do you hold back the tides of time?

Migration Equations

For some countries, the answer is to give its labor market a shot in the arm with increased immigration. Canada saw its largest-ever population growth in 2022 in large part because of a migrant recruitment drive. Germany is directly cribbing off Canada, copying its points-based system to make it easier for immigrants to have their professional qualifications recognized without a German equivalent, and allowing immigrants to claim citizenship after only five years rather than eight.

But migration can only help so much. “It is a relatively short-term fix,” Professor Christian Dustmann, an economist and expert in migration at University College London, told The Daily Upside.  “What we see in the data is that immigrants very rapidly adjust their fertility rates to the native population. That means that in the longer run, we would have to continue this process over and over again,” he said. He added that in some European and Asian countries the changes are so dramatic, huge numbers of immigrants would need to be brought in to keep the working population share on an even keel. 

Pension Tension

Beyond immigration, the other way to combat aging demographics is to re-jig which parts of your society are economically productive. The clearest way to do that — unless you’re Emmanuel Macron — is raising the retirement age.

Barr, an expert in pensions, said that modern government retirement systems still haven’t adapted to the new demographic reality, despite the fact that the post-war baby boom has been known about since shortly after 1948. “It’s no secret that there’s a lot of older people, we’ve known this for 70-plus years. So it’s not as though there wasn’t decades of warning for governments to respond and they’ve left it too late. That’s why people now talk about a crisis,” he said.

(Credit: Our World In Data)

Dustmann said the labor market will need to recalibrate itself to welcome older workers. Some employers already appear to be on board, as The Wall Street Journal reported this week that some companies are introducing new grandparental leave policies, allowing new grandparents to take time off work.

“Especially in these days when labor markets are extremely tight, companies need to think of ways to keep workers for longer,” Dustmann said, adding he thinks the new grandparental leave policies are an “interesting idea clearly going in the right direction.”

Technology To The Rescue: If people were to work further into their autumn years, then work would need to adapt to the reality of more workers with dodgy knees and bad backs. Luckily, according to Dustmann, technology can take the wheel.

“Over the last few decades we have seen a dramatic shift from very physical work in all types of occupations to work which is easier today because it is partly done by machines,” he said. “In the ‘70s, we still had cars produced on long conveyor belts where workers were doing the same task over and over again. All that is done by robots now.”

Wannabe Baby Drivers

There is, of course, one other way a country’s population can skew younger, and that’s by reversing one of the two trends pushing ages higher. Since no one’s particularly eager to lower life expectancy, that leaves one option: more babies.

Some countries, not to mention some billionaires, adopt pro-natalist policies in an effort to encourage more births and counter aging populations: 

  • Both Japan and China have brought in state-sponsored dating services in an effort to get their citizens coupled up and settled down, ready to start a family tout de suite
  • For China, this represents a huge reversal from just a few decades ago, when couples were penalized for having more than one child

But pro-natalist policies are often ideologically driven and miss the point of what’s disincentivizing people — especially women — from having a child. 

“I am not aware of any pro-natalist policy in any country that has ever worked,” Professor Barr told The Daily Upside. “If one thinks about the costs of having a child, not just money, all sorts of things, it’s huge. Paying slightly higher child benefit or giving pension concessions, although thoroughly good ideas in their own right […] don’t encourage women to have more children.”

Pro-natalist policies are also sensitive to wider economic pressures. In Hungary, generous government incentives to get married fostered a wedding industry which boomed even through 2020, but what Covid couldn’t kill, inflation did. Hungary is home to the highest inflation rate in the EU, and couples are thinking twice before serving lunch for all their relatives.

Rebalancing the scales: One arguably pro-natalist approach that governments could take would be making it easier for women and mothers to participate in the workforce, unlocking their economic potential. 

Dustmann pointed to Scandinavian countries, which have high workforce participation rates from women and whose populations are aging less rapidly than, for example, South Korea. 

Silver Hair and Silver Linings

Despite the big mechanical, economic challenges posed by aging populations, Barr isn’t overly worried. “What happens to population for the most part is beyond human control,” Barr said. “It’s the result of the decisions of billions of individuals and couples. So there’s no point in panicking.”

To keep this all in perspective, the problems that come with an aging population are the result of medical and educational advances that would have been the wonder of even our not-so-distant ancestors. 

“Increased life expectancy is one of the great welfare triumphs of the 20th century. People are living longer, healthier lives” Barr said, adding: “It’s a lovely problem to have.”