Declining Working-Age Populations and Their Impact on the Global Economy
One of the more overlooked factors that is in no small part responsible for the recent run of relatively sluggish economic growth around the world is the fact that the working-age (and consuming-age) populations of many of the world’s leading economies are now in decline. Moreover, this decline in working-age populations is set to become even more pronounced in most areas of the world in the coming decades, posing a major threat for the global economy. First, lower numbers of workers will result in lower levels of economic output without corresponding major increases in productivity. Second, lower numbers of consumers will reduce demand levels in many of the world’s most important consumer markets. Third, without major changes in working patterns, the dependency ratio (the ratio of non-workers to workers) in most major economies will rise dramatically in the coming years. As such, many countries will face a major challenge in managing to maintain and boost economic growth rates as a result of these dramatic demographic changes.
The most pressuring demographic challenges are found in the developed economies of East Asia and Europe, particularly in those countries that have some of the lowest birth rates in the world as well as very low levels of immigration. Nowhere is this demographic challenge more evident than in Japan, where the country’s working age population is forecast to decline by 27% over the next 30 years. This decline in Japan’s working age population has already been in place for many years and has been a key factor in the more than two decades of economic stagnation in Japan. Europe is also facing a major demographic challenge as its working-age population is also in decline. Moreover, Europe’s fastest-shrinking working-age populations are not just found in southern and eastern Europe, but also in Germany, one of the key drivers of the European economy. As such, both Japan and Europe face major challenges to their domestic market growth and to their economic competitiveness, and both of these factors have dramatically reduced their economic growth potential.
While other developed economies such the United States, Britain, Canada and Australia do not face such pressing demographic declines as their counterparts in Japan or continental Europe, they too will record lower rates of working-age population growth in the coming decades. In the United States, the working-age population is forecast to grow by 12.4% over the next three decades, well above the level of most other developed economies, but well below the level of working-age population growth in the US in previous decades. In Canada, the working-age population is forecast to remain near current levels in the coming decades, adding an additional challenge to the economic competitiveness issue facing the Canadian economy. Meanwhile, Britain is the only large European economy forecast to record an expansion of its working-age population over the longer-term, although the impact of Brexit on immigration into the UK remains to be seen. Finally, Australia’s strong economic performance in recent decades has been fuelled, in part, by the fastest-growing working-age population in the developed world, a trend that is forecast to continue in the coming years.
The threat of demographic decline is not only being faced by developed economies, but also by many of the world’s leading emerging markets. Moreover, lower levels of economic development and weaker social welfare systems add to the risk levels posed by shrinking working-age populations in emerging markets. For example, China’s economic competitiveness is rapidly being eroded by its shrinking labor force. Where China once had massive amounts of excess labor, today’s China faces the prospect of a rapidly-shrinking labor force as the country’s working-age population is forecast to decline by nearly one-fifth over the next 30 years. In Central and Eastern Europe, working-age populations are falling faster than almost anywhere else in the world and this has long-term ramifications for the countries of this region. Elsewhere, working-age populations are forecast to remain near current levels in much of Southeast Asia and Latin America, reducing the longer-term growth potentials for both regions’ economies.
Despite this dire outlook for long-term economic growth, there is some hope for the future of the global economy. First, those regions that are seeing their working-age populations stagnate or decline could experience significant environmental benefits from the end of their rapid population growth. Second, working-age populations are forecast to continue to rise at a rapid pace in regions such as South Asia and Sub-Saharan Africa, boosting those regions’ growth and helping to develop new centers of manufacturing and consumption in regions desperately in need of investment. Third, improvements in health and living conditions are enabling people to remain productive members of society much later in life, although some countries have struggled to raise retirement ages in the face of popular opposition. Finally, the most important factor that will determine whether or not economic growth can be maintained as working-age populations decline is productivity. If productivity levels rise substantially, there is no reason why the global economy cannot continue to expand, even as population growth slows. In short, managing lower working-age population growth and boosting productivity levels will be two of the key challenges facing the global economy over the remainder of the 21st century.