The aging of the population reduces the growth of economies and living standards

The way out is to increase productivity, but it slows down due to aging

Olga Kuvshinova, Vedomosti, 24.10.2016

The aging of the population is a problem covering economies with a combined share of 78% of world GDP (64% of GDP at purchasing power parity), Morgan Stanley analysts calculated. The global growth of the working–age population is slowing down: in 2016 - 1% against 1.6% on average annually over the previous 20 years. This leads not only to an increase in the demographic burden (the number of pensioners and children in relation to workers), but also to the aging of the workforce itself. The share of 55-64-year-old workers in the world will increase from the current 13% over the next 10 years to 15% against a stable 10% in the previous five decades. And in the USA, the eurozone, Japan, China and the UK – the largest economies for which the problem of aging is most acute – from 17 to 21% in 2030.

The aging of the population is faced not only by developed, but also by developing countries, which can grow old faster than they can get rich, does not exclude HSBC: for example, in Thailand and Korea, the working-age population will decrease by a quarter in the next 35 years, and the number of pensioners will triple, in Russia in 2030 there will be more pensioners than children. A slowdown in economic growth will lead to a decrease in the growth of household incomes and living standards, McKinsey notes.

The rapid economic growth of the second half of the XX century was based on two factors: an increase in the share of the able-bodied population and an increase in labor productivity. Now it is possible to support the growth of economies only through more intensive productivity: even its preservation at the same level (1.8% on average per year over the past 50 years) slows down potential global growth, according to McKinsey calculations, by 1.4 times – from 3.6 to 2%. To compensate for the effect of aging and maintain social and debt obligations, the average global labor productivity should accelerate by 1.8 times to 3.3%.

In Japan, which was the first to pass the demographic turning point back in the early 1970s, the halt in the growth of the working-age population led to a slowdown in economic growth almost threefold – to 3.4% on average in 1973-1980 from 9.3% in 1950-1973, while the total contribution of productivity factors fell from 5.4 to 0.9%, Morgan Stanley compares. An increase of 1 percentage point in the share of workers over 55 in the eurozone leads to a slowdown in productivity growth by 0.75 percentage points. In the United States, a 10% increase in the share of those over 60 slows down GDP growth per capita by 5.5%.

The aging of the population limits productivity growth due to a decrease in the level of innovation, slower pace of technology spread, lists Morgan Stanley. The productivity of an employee changes during his life: experience accumulates, knowledge becomes obsolete, age affects the physical and mental state, writes the IMF. Although everything is not so clear: as Stefan Veen from the University of Zurich found out, productivity is most sensitive to age in sectors where blue-collar workers are employed (for example, in construction), in the banking sector it does not depend on the age of employees in any way, and lawyers, scientists, managers and doctors, on the contrary, only increases with age. Therefore, the impact of the aging workforce on the economy also depends on the structure of the economy itself. The higher the proportion of physical labor, the more difficult it is to deal with the effects of aging, emphasizes James Pomeroy from HSBC.

The impact of population aging on the economy can be mitigated by state policy measures, Morgan Stanley lists – to increase the share of government spending on research and development, stimulate retraining, accelerate the introduction of technological innovations. It helps to increase the openness of the economy: competition is growing, the exchange of best practices and technologies is becoming more intensive.

In Russia, over the past 50 years, the number of employed people has increased by 20%, in the next 50 years it will decrease by 29%, McKinsey calculated (based on maximum economic activity and minimum unemployment). If labor productivity does not increase, then the average annual growth of the economy will fall by 60%, from 1.6 to 0.6%. It is possible to slow down the decline in total employment by stimulating the employment of young people and the elderly, as well as by implementing a high-quality migration policy. To increase labor productivity – by supporting retraining of workers, the movement of labor from low-productivity sectors to high-productivity, geographical and industry mobility, advises McKinsey. According to the calculations of the World Bank, the aging of the population will slow down the growth potential of the Russian economy for the next 15 years to 1.3%. The policy of increasing the employment of young and elderly cohorts is able to increase this potential by 1.5 times to 1.9%. It involves comprehensive measures in the field of healthcare (emphasis on preventive medicine), education (including leisure time for preschoolers to increase the employment of young mothers), labor and social spheres (reducing gender pay gaps, replacing long maternity leave with short but well-paid ones), as well as stimulating enterprises to implement an employment policy for the elderly (flexible schedule, taking into account physical capabilities). Such reforms affect long-term GDP growth, according to the calculations of the World Bank, more strongly than the increase in the price of oil to $ 120/bbl.

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