Workers on the production line at a Honda plant in Ozu. Japan has already undergone changes that are now happening elsewhere. © Tomohiro Ohsumi/Bloomberg via Getty Images

Demographics, the study of the changing structure of populations, is widely acknowledged to be critically important. But demographic changes occur so slowly that almost no one considers their impact on markets, the economy and society, except as something that will happen some day in the distant future.

Four key, long-running trends in the world economy have continued for more than three decades, and each of them is rooted in demography. Earnings have been slowing, in some cases even falling, in the advanced economies, with very little explanation as to why. Membership of trade unions in the private sector has been falling sharply. Inequality, within countries, though not between them, has risen, with Thomas Piketty, the French economist, famously ascribing this to a tendency for the rate of return to capital to exceed growth. Interest rates have been falling for the last 35 years and this has often been attributed to a decline in investment relative to savings.

All four trends were caused largely by a demographic “sweet spot” that developed some time around 1970 (sweet from the perspective of global growth, if not from that of workers). This was caused, in turn, by a marked decline in birth rates, especially but not only in advanced countries. As large numbers of young people entered the working population, the ratio of workers to dependents increased sharply (see charts 1 and 2 on p31). There was a sharp increase in the working age population since 1970 and then a doubling, and more, of the size of the global labour force thanks to the entry into the global economy of China and countries in eastern Europe from 1990 onwards.

A combination of these effects lowered incomes and labour productivity, relative to capital and management, and so raised inequality and reduced the incentive to invest in the advanced economies. The effect was to lessen the bargaining power and wages of workers, as businessmen could credibly threaten their employees with relocation of their operations to China or the Czech Republic. The resulting switch of such operations to cheaper offshore locations dampened inflation. This, together with the fall in the ratio of dependents to workers, drove up supply relative to demand. This in turn forced central banks to ease interest rates, thereby driving up asset prices and causing a further ratcheting-up of inequality.

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