Globally, and especially in developed countries and in China and some other developing countries, the population is ageing rapidly. That population ageing is making a lot of people nervous because of its implications for the economy. In the future, a larger proportion of the population who are retired older people will need to be supported by a smaller proportion of the population in the labour force. However, such an 'old age support ratio' conception of the economic problem of population ageing only paints a partial picture.
We can decompose GDP per capita as follows (as shown in this post):
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). As the population ages, WA/P decreases, and that should contribute to lower GDP per capita - that is, lower economic growth (unless, as noted in this post, it is offset by increasing productivity).
Both of those conceptions of the economic problem of population ageing are related to relative decline - the older population as a share of the total population increasing (what is referred to as structural ageing). The problem gets much worse if the size of the working age population declines in absolute terms. That is the problem that this 2024 working paper by Charles Kenny and George Yang (both Center for Global Development) looks at (with less technical summary here). Specifically, Kenny and Yang investigate the economic implications of a declining prime age population (those aged 15 to 65 years), focusing on:
10 year bond yields, consumer price indices, total and female labor force participation, GDP, government expenditures, government revenue, and stock returns.
Using data from the UN World Population Prospects, Kenny and Yang categorise countries into those where prime age population growth (PAPG) is positive, and those where PAPG is negative, and then compare the two groups. First though, the share of countries with positive and negative PAPG is instructive, in terms of demonstrating population ageing. Here is Figure 1 from the paper, which shows the number of countries with positive (pale blue) and negative (red) PAPG:
Prior to 1995, few countries experienced negative PAPG, but by 2060 more than half of countries will experience a declining prime age population. Does the degree of PAPG matter? Kenny and Yang show that it does, finding in a two-way fixed effects regression model that:
...higher PAPG is correlated with lower government expenditure, greater revenue, higher 10 year yields, and greater stock index returns, but suggests an insignificant effect on growth and labor force participation.
Interestingly, Kenny and Yang also find that higher PAPG is associated with higher inflation. Turning all of that around, lower PAPG is associated with higher government spending, lower government revenue, lower bond yields, lower stock returns, and lower inflation. That is consistent with governments having to spend more on pensions and health care, receiving lower tax revenues from a smaller labour force, and lower investment returns as portfolios are shifted to less risky options (bonds, rather than shares).
Kenny and Yang also find a significant discontinuity between countries with positive and countries with negative PAPG. Even controlling for a linear effect of the level of PAPG, negative PAPG is associated with lower economic growth, higher government spending, higher inflation, lower 10-year bond yields, as well as lower female and total labour force participation rates.
Kenny and Yang conclude by noting that there are few effective strategies for mitigating the impact of declining prime-age population growth. One suggestion they make is migration. However, as I have noted before, migration cannot be a solution to population ageing. Kenny and Yang dismiss the idea of technological change, such as robots and AI, but it seems that it might be the only way to preserve high living standards (at least, as measured by GDP per capita), by rapidly increasing productivity.
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