Significant policy interventions will be needed to address the demographic imbalanceby George Magnus / May 9, 2018 / Leave a comment
Unless fertility rates rise dramatically in advanced economies in the next 20-30 years, their ageing populations will become a serious problem.
The issue is not that we are living longer and have many years ahead of us after retirement; both of these things are cause for celebration. But the change in the age structure of our populations is going to give rise to a spate of economic problems, to which we will have to develop various coping mechanisms. One fundamental issue is labour force participation.
With the surge in the numbers of those aged over 65, the dependency ratio in rich economies will rise from about 27 per cent to around 46 per cent by 2050. That’s a fall from about 3.7 working age people per retiree to just over two people. In the absence of compensating policies, this change in age structure is going to lower the labour force participation rate—the proportion of those of working age who are actually working.
Thanks to medical advances, as people reach the traditional age of retirement they may be able to carry on working for a few years. They will remain, therefore, members of the working age population, which has conventionally been defined as 15-64 but which may nowadays have an upper limit of 67 or even 70. Yet if labour market, employment and retirement practices don’t change, many will in reality drop out of the labour force, and consequently the participation rate will decline.
A fall in the labour force participation rate is indicative of weakness in the labour market, and of slower growth in the economy and in wages and salaries. And as we know from the last decade, it’s also a phenomenon associated with adverse social and political trends.
Looking back over the last decade to the financial crisis, we have seen a significant difference in labour force participation when comparing the United States with Europe. The latter has fared much better. In the US in 2008, the rate was over 66 per cent, but by 2015 it had fallen to 62.3 per cent. Since then it has inched back up to stand at 62.8 per cent. European countries have not experienced such a fall overall, even in countries like Spain and Italy which have traditionally had rather sclerotic labour markets.