Sunday, 28 January 2018

Will population ageing lower economic growth?

Globally, the world population is ageing, and it is ageing in some countries (mostly developed countries, but also China) faster than others. That leads to a potential problem. Older people are less likely to work than younger people, and some consider that older workers are less productive (although that point is contested - see here). [*] So, it is reasonable to wonder: will population ageing have a negative impact on economic growth?

If we take GDP per capita as a measure of living standards or wellbeing (and hence, economic growth is represented by an increase in GDP per capita), we can decompose GDP per capita as follows [**]:

[Y/P] = [Y/L] * [L/WA] * [WA/P]

where Y is output, P is population, L is the labour force, and WA is the working age population. This identity simply says that GDP per capita (or output per person, Y/P) is made up of labour productivity (or output per unit labour, Y/L), labour force participation (L/WA), and the share of the working age population in the total population (WA/P).

For an ageing population to decrease the growth in Y/P, then it must decrease either:

  1. Labour productivity - contested, but possible, especially if you consider manual-labour-intensive tasks;
  2. Labour force participation - seems possible, since older workers are less likely to be in the labour force, especially in countries where they have access to pensions or can draw from retirement savings; and/or
  3. The share of the working age population in the total population - almost certain, given that as the population ages overall, then young people (who are not in the working age population) make up a smaller and smaller proportion of the total population.
So we've established that, in theory, the ageing population should reduce economic growth. But what does the empirical evidence tell us?

A recent NBER working paper by Daron Acemoglu (MIT) and Pascual Restrepo (Boston University) looks directly at the available data on population ageing and economic growth (ungated version here), and finds that:
...since the early 1990s or 2000s, the periods commonly viewed as the beginning of the adverse effects of aging in much of the advanced world, there is no negative association between aging and lower GDP per capita... we show that even when we control for initial GDP per capita, initial demographic composition and differential trends by region, there is no evidence of a negative relationship between aging and GDP per capita; on the contrary, the relationship is significantly positive in many specifications.
In other words, countries that are ageing faster actually also have faster (not slower) economic growth. What is going on? Acemoglu and Restrepo argue that it is the rise of labour-saving technology, in the form of robots and artificial intelligence, and they show that:
...countries experiencing more rapid aging are the ones that have been at the forefront of the adoption of one important type of automation technology: industrial robots.
Going back to our identity from earlier in the post, it seems that even if labour force participation (L/WA) and the share of the population that is working age (WA/P) are decreasing, they are being more than offset by an increase in labour productivity (Y/L). It is difficult to say whether this situation can continue indefinitely, but for now, perhaps those that believe that population ageing will have negative effects on economic growth are just as wrong as Malthus about unsustainable population growth, and for the same reason (technological change)?

[HT: Marginal Revolution, this time last year]

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[*] Also, the secular stagnation hypothesis suggests that, when interest rates are low (and the real interest rate is negative), an ageing population will lead to lower growth (see here). 

[**] As per this earlier post, I note that this decomposition comes from a discussion with Jocelyn Finlay from Harvard School of Public Health, when I was on Study Leave there back in 2016.

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