Population ageing can't be balanced by migration

A headline in The Conversation today attracted my attention for all the wrong reasons:

Migration helps balance our ageing population – we don’t need a moratorium

I'm not sure if the researcher who wrote the article (Liz Allen of Australian National University) should be held responsible for the headline, but the data in the article doesn't support the headline, and neither does years of research in Australia and New Zealand, including by Natalie Jackson and myself.

To illustrate, one of the key figures from the article is reproduced below (you can find the actual data in The Conversation article). The vertical axis shows the 'dependency ratio' (the number of people aged 0-14 years old or 65 years and over, for every 100 people of working age (15-64 years)). The different coloured lines track different population projections for the Australian population, based on different assumptions about annual net international migration (between zero migration - the red line, and 280,000 net international migration per year - the grey line). Notice that the dependency ratio increases regardless of migration scenario. Irrespective of the projected level of net international migration in Australia, the dependency ratio increases. While the zero net migration scenario is the worst, there is clearly no 'balancing' of population ageing by international migration.

The reason for this is simple. International migrants may be younger (on average) than the domestic population, but migrants get older just like the domestic population does. In order to offset the ageing of the domestic population plus the ageing of the newly arrived migrants, you would need to increase migration even further. In fact, you would need accelerating net international migration in order to offset population ageing. That simply isn't realistic for mathematical reasons (you'd soon run out of young people internationally who wanted to move to your country), if not for political reasons.

This isn't a new insight for Australia or New Zealand. Rebecca Kippen and Peter McDonald wrote a number of papers in the late 1990s and early 2000s on this issue, based on Australian data (see here and here and here). Natalie Jackson and I had a paper published last year in the Journal of Population Ageing (ungated earlier version here), which included a similar analysis for New Zealand. In that paper, we wrote that:

...extremely high migration levels would have only minimal impact on the proportion of the population aged 65 years and over in 2068. Zero net migration (Scenario 8) would see around 28.1% aged 65 years and over in 2068, while net migration of 150,000 per year would reduce that to 23.6% (Scenario 1). The resulting populations would number around 5 million and 16.3 million respectively. Thus, the reduction of 4.6 percentage points in ageing (by comparison with the zero migration scenario) would come at a ‘cost’ of 11 million additional people. Similarly, the addition of 10.4 million migrants over the period 2013–2068 would reduce the proportion under the equivalent of Statistics New Zealand’s medium variant projection (Scenario 7) in 2068 by just 3.5 percentage points.

In other words, it requires unrealistic levels of net international migration to have an appreciable impact on population ageing. And you can see that for yourself if you look back at the diagram from Allen's article I reproduced above. The difference between 200,000 net international migration and 280,000 net international migration per year is almost imperceptible in terms of the impact on the dependency ratio. It would take millions of annual migrants to 'balance' the increasing dependency ratio arising from population ageing. And then, as I note above, millions more to offset the ageing of those migrants. And so on.

Notwithstanding all the analysis in the papers I mentioned above, international migration actually could be a solution to population ageing. However, this solution only presents itself if the migration is the outward migration of older people (not the inward migration of younger people). As far as I know, no one is yet advocating for rounding up oldies and jetting them off overseas to see out their remaining days, in order to lessen the burden on the working age population.

So, forget balancing population ageing with migration - it isn't going to happen.

Digging holes and filling them in again

This week in ECONS102, among other things we will be discussing the diminishing marginal product of labour. The example I use to illustrate this concept is a simple firm that digs holes, transports the dirt to the other side of the site, and fills in the previous days' holes. It's a ludicrous example, but as it turns out it is now not without precedent, thanks to this example from the clean-up of the California wildfires of 2017:

Over the next seven and a half months, contractors worked across Sonoma, Mendocino, Napa and Lake counties, where they scraped 2 million tons of soil, concrete and burned-out appliances from 4,563 properties, loaded it all into dump trucks, and hauled it away.

In the end, the government-run program was the most expensive disaster cleanup in California history. The project, managed by the Army Corps of Engineers, totaled $1.3 billion, or an average of $280,000 per property. The bulk of that $1.3 billion comes from the Federal Emergency Management Agency (FEMA), but state and local governments are also responsible for about $130 million...

The Army Corps of Engineers said the high cost of the project was necessary to ensure a safe and effective cleanup. But KQED found that these multimillion-dollar federal cleanup contracts actually incentivized unsafe and destructive work...

Critics say many of the problems with the project -- high cost, safety lapses and over-excavation -- are linked to the primary incentive structure that the Army Corps put into place: paying by the ton.

Contracts reviewed by KQED show that the Army Corps of Engineers paid upward of $350 per ton for wildfire debris. Dan’s truck could haul about 15 tons. That’s more than $5,000 per load -- a powerful financial incentive to haul as much heavy material as possible as quickly as possible.

Dan said he saw workers inflate their load weights with wet mud. Sonoma County Supervisor James Gore said he heard similar stories of subcontractors actually being directed to mix metal that should have been recycled into their loads to make them heavier.

“They [contractors] saw it as gold falling from the sky,” Dan said. “That is the biggest issue. They can’t pay tonnage on jobs like this and expect it to be done safely.”...

Paying contractors by the ton incentivizes them to haul away as much dirt, rocks and concrete as they can.

“It's such a needless waste of our society's resources to pay by the ton,” said Sonoma County contractor Tom Lynch, who was an early and vocal critic of the program.

So many sites were over-excavated that the Governor’s Office of Emergency Services recently launched a new program to refill the holes left behind by Army Corps contractors. That’s estimated to cost another $3.5 million.

As Steven Levitt and Stephen Dubner noted in their book Think Like a Freak (which I reviewed here), no individual or government will ever be as smart as all the people out there scheming to take advantage of an incentive plan. So, when you pay contractors for every ton of debris they remove, you create an incentive for contractors to maximise the number of tons of debris they remove. Sounds good in theory, but nobody should be surprised that the contractors 'find' additional tons of 'debris' to remove.

[HT: Marginal Revolution]

The ancestral characteristics of modern populations

Economic development is remarkably persistent. There is plenty of research that demonstrates that historical patterns of development are predictive of current patterns of development (for example, refer to the research by Daron Acemoglu and James Robinson, as detailed in their book Why Nations Fail (which is on my long list of books-waiting-to-be-read).

Paola Giuliano (UCLA) and Nathan Nunn (Harvard) have a new dataset that, as far as I can see, has enormous potential for looking at a wide range of questions in development, as well as providing a host of candidate variables for use as instruments in otherwise-unrelated analyses. The development of the dataset is described in an article published earlier this year in the journal Economic History of the Developing Regions (ungated version here). The dataset itself is available from Nathan Nunn's website here.

The journal article by Giuliano and Nunn explains:

We contribute to this line of research by providing a publicly accessible database that measures the economic, cultural, political, and environmental characteristics of the ancestors of current population groups... Specifically, we construct measures of the average pre-industrial characteristics of the ancestors of the populations in each country of the world. The database is constructed by combining preindustrial ethnographic information for approximately 1,300 ethnic groups with information on the current distribution of approximately 7,500 language groups measured at the grid-cell level.

Giuliano and Nunn then go on to describe the dataset, as well as providing illustrations of the data. What particularly caught my eye was a brief analysis they did of the relationship between their historical geographic characteristics (meaning the average ancestral characteristics of populations living in current countries) and current GDP. They find that:

Not surprisingly, being further from the equator is positively associated with real per capita GDP. However, what is more surprising is that the ancestral measure appears to be much more strongly correlated than the contemporary measure. This is particularly striking since we would expect the ancestral measure to be more imprecisely measured than the contemporary measure.

They find similar results for ancestral ruggedness of the land, and ancestral distance from the coastline. The reason these results caught my eye was that it suggests to me that these variables might be suitable instruments for GDP in other analyses (such as when GDP would be endogenous in the particular model you are trying to run. If that was a bit too pointy-headed for you, don't worry. It just suggests that these variables have a lot of potentially cool uses for economists.

[HT: Marginal Revolution]

Of mice and men

When considering a decision about whether to do something or not, we are thinking about the future. For example, say that we are managing a firm that has an ongoing project and we are considering whether to persist with the project or to stop the project and divert the resources to an alternative project. In this case, we should only be considering the future. Costs (and benefits) that have already occurred and that cannot be recovered are sunk costs. They should not affect our decision-making. And yet, so often they do.

Richard Thaler, the 2017 Nobel Prize winner whose work is neatly summarised in his book Misbehaving: The Making of Behavioral Economics (which I reviewed here), says that the sunk cost fallacy arises because of a combination of loss aversion and mental accounting.

In general, people are loss averse because we value losses more than we value equivalent gains. Gaining $10 makes us happier, but losing $10 makes us unhappier to a greater extent than gaining $10 makes us happier. So, we generally try to avoid losses.

Mental accounting suggests that we keep 'mental accounts' associated with different activities. We put all of the costs and benefits associated with the activity into that mental account, and when we stop that activity, we close the mental account associated with it. But if the mental account has more costs in it than benefits, it is a loss. And because we are loss averse, we try to avoid closing the account.

So, you can see why a manager might be reluctant to stop a project that is incomplete, even if (and maybe especially if) it has cost a lot so far. Sunk costs may not affect the decision-making of a purely rational decision-maker, but for someone who is quasi-rational (and therefore affected by loss aversion and mental accounting), the sunk costs are relevant to their decision.

Now, it seems that humans are not the only creatures subject to the sunk cost fallacy. New research, reported in the New York Times last week, suggests that mice have the same problem:

This “sunk cost fallacy,” as economists call it, is one of many ways that humans allow emotions to affect their choices, sometimes to their own detriment. But the tendency to factor past investments into decision-making is apparently not limited to Homo sapiens.

In a study published on Thursday in the journal Science, investigators at the University of Minnesota reported that mice and rats were just as likely as humans to be influenced by sunk costs.

The more time they invested in waiting for a reward — in the case of the rodents, flavored pellets; in the case of the humans, entertaining videos — the less likely they were to quit the pursuit before the delay ended.

“Whatever is going on in the humans is also going on in the nonhuman animals,” said A. David Redish, a professor of neuroscience at the University of Minnesota and an author of the study. 

So take heart. You may not be purely rational but, in the animal kingdom, you're not alone.

[HT: Marginal Revolution]