The Perils of a Declining Labor Force

The ongoing global demographic transition is simply massive in scale and likely impact. For nearly all of the past 200 years (and longer), the vast majority of the world's countries have seen population growth and, in particular, working-age population growth. As they've gone through the 'demographic transition' toward lower birth rates, they've also seen a rise in the working age share of their total population. But, as countries age, that working age share is dropping. A growingpile of studies suggest that a decline in that share can have grim outcomes-affecting innovation, investment, government budgets, and economic growth with knock-on effects on politics and beyond. But, by the 2050s, the majority of the world's people will live in countries where the absolute working age population is declining-there will be fewer people in the (potential) workforce next year than this. In a new paper, George Yang and I look specifically at the impact of this absolute decline-the almost uncharted territory that most of the world is entering in the coming three decades.

One reason to think that an absolute decline in the working-age population might be an additional burden on economies, even beyond the well-studied decline in the working-age share, is the idea of stranded capital. The idea of stranded capital is usually associated with climate change and the risk that investments in carbon-intensive industries will see low returns as policy and technological change reduces demand for their products. But a similar process may occur with labor-intensive industries in the face of a declining labor force: there simply won't be the workers to fill existing jobs, and the capital associated with those businesses will simply become worthless.

Figure 1. Count of countries with expected negative vs. positive prime-age population growth (PAPG)

The figure below looks at GDP per capita for countries that enter negative prime-age population growth (where the absolute number of working age people is declining) as a proportion of the average of all other countries in their income group, lined up so that year '0' is when negative prime-age population growth begins and scaled to 100 in that year. The direction red line represents GDP per capita performance relative to income group comparators over time for countries that cross into negative prime age population growth at year zero. That transition is associated with falling behind peers in terms of per capita GDP growth. High-income countries experiencing positive prime-age population growth have seen an average 2.8 percent annual GDP growth of late. That compares to 1.5 percent for those seeing negative population growth.

We use regression analysis to further unpack the impact of an absolute decline in prime-age population. In our analysis, GDP per capita growth, while unconditionally uncorrelated with prime-age population growth, is on average lower by 0.9 percentage points when prime-age population growth is negative.

The good news for countries already undergoing the transition to negative prime-age population growth is, for a while at least, there are still many economies seeing positive prime-age growth. Some of them are filled with increasingly educated populations of young people, many of whom might be keen to move to fill the jobs that need doing in negative-growth economies. Aging Europe has a particular advantage in that regard: it is close to Africa, home to a lot of those young countries.

The economic case for more migration is strong whether local workforces are expanding or contracting, but that hasn't been enough in the past to overcome opposition to a lot more migration. What is different about passing peak prime-age employment is that it changes the politics by changing the framing of the migration discussion-from arguments pro and con around "they take our jobs" we move into "who's going to fill the jobs we need doing?" I think that shift helps explain a U-shaped relationship between aging populations and attitudes towards migrants in Europe: first, aging is associated with a rise in anti-migrant sentiment but then, as concerns over who is going to look after all the old people begin to rise, that trend reverses. And it helps explain why much of the rich world is seeing attitudes shift in a pro-migration direction. I hope European leaders are smart enough to grasp the opportunity presented by shifting attitudes at home and rising talent in the South.

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