Are Demographics Beginning to Change?

Stephen DeAngelis

August 18, 2009

A recent article in The Economist declared that “demography means virtually all of us will have to work longer [“The end of retirement,” 27 June 2009 print issue]. It went on to say that all of us working longer “need not be a bad thing.” As a businessman, I view demographics in a number of ways. Demographics tell me something about the pool of workers from which I can draw employees. They inform me about the location, make-up, and changing tastes of potential clients. Demographics can also help me see trends that might affect the future business environment throughout the world. The article’s conclusion that we will all have to work longer is based on decades of data that shows birth rates in developed countries have been dropping. Some countries, like Japan and Russia, have actually begun to depopulate. The article continues:

“Although the idea that ‘we are all getting older’ is a truism, few governments, employers or individuals have yet come to terms with where longer retirement is heading. … This imminent greying of society is compounded by two other demographic shifts. First, in most rich countries women no longer have enough babies to keep up the numbers (a prospect that may please a lot of greens but not many governments); and the huge baby-boom generation, born after the second world war, has begun to retire. In 1950 the OECD countries had seven people aged 20-64 for every one of 65 and over. Now it is four to one—and on course to be two to one by 2050. That will ruin the pay-as-you-go state pension schemes that provide the bulk of retirement income in rich countries. It is tempting to think that some of the gaps in the rich countries’ labour forces could be filled by immigrants from poorer countries. They already account for much of what little population growth there is in the developed world. But once ageing gets properly under way, the shortfalls will become so large that the flow of immigrants would have to increase to many times what it is now. Given the political resistance to even today’s levels of immigration (as shown up in the recent elections to the European Parliament), that, alas, looks unlikely. So individuals, companies and governments in rich countries will have to adapt.”

Japan, which has been faced with a rapidly aging population for years, has hoped that robots could replace retiring workers (see my post Demographics and Robots). The article believes that the most important adjustment that can be made is keeping people in the workforce longer.

“As for the older workers themselves, many of them seem keen enough to carry on beyond retirement. A recent Financial Times/Harris poll showed most Americans, Britons and Italians would work for longer in return for a larger pension (though Germans were much less enthusiastic). This surely makes sense: as long as the job is not too onerous, many people benefit in mind and body from having something to get them out of the house. Many baby-boomers say they never want to bow out altogether, though they would often prefer to put in shorter hours. If they want to go on working, they will have to accept that pay can go down as well as up. … Many [government policies] that make sense anyway, such as making benefits more portable, encouraging immigration, promoting private saving or reforming health care, make even more sense now. Banning mandatory retirement ages in the private sector (as America has done) looks sensible, as does creating conditions in which people can retire more gradually.”

All of this worry about decreasing birth rates may seem counterintuitive considering that the world’s population is anticipated to grow by another 3 billion people between now and 2050. The issue is that most of that growth is going to come in countries that can least afford to deal with the increase. The resulting “youth bulge” in developing countries is likely to keep many regions unstable for the foreseeable future. The only way to mitigate potential acts of instability generated by restless youth without jobs is to create jobs for them. That, however, is a daunting challenge. As I noted in a recent post, the Arab world alone must create 50m new jobs by 2020 to accommodate a growing, youthful workforce.

America is the one developed country that has bucked the demographic trend and has continued to grow(it has now been joined by Britain and France). According to the New York Times, “In 2007, the number of births in the United States broke a 50-year-old record high, set during the baby boom.” America’s relatively high birth rate was expected to continue but the 2008 recession caused a decline [“Birth Rate Is Said to Fall as a Result of Recession,” by Sam Roberts, New York Times, 6 August 2009]. Some analysts expect the birthrate to climb once the recession is over. The same is not true for many other countries [“Suffer the little children,” The Economist, 27 June 2009 print edition].

“As almost everybody lives ever longer, a reasonable supply of young people is needed to counterbalance—and fund the pensions of—a growing number of older folk. In fact, fertility rates have dropped steeply in all OECD countries in the past few decades, from an average of 3.2Developed world birth rates children per woman in 1960 to 1.6 now. The rate needed to keep the population stable (assuming unchanged mortality rates and no net immigration) is 2.1. According to the UN’s latest population estimates, fertility is currently below replacement level in over 70 countries, which account for nearly half the world’s population. But even in the remaining, poorer, half of the world, fertility rates have come down spectacularly, from 5.2 in 1970-75 to 2.6 now. This has been the most important factor by far in the ageing of populations around the world.”

Like most articles about demographics, this one singles out Japan as country with significant challenges.

“Japan has seen especially rapid greying. Immediately after the second world war it was one of the world’s youngest developed countries, with a median age of 22. But because so few people were having babies, the median age has doubled since then and is still rising fast. The population, currently about 127m, has already started to decline. It will drop below 100m by 2046 and continue downwards rapidly thereafter, according to a white paper prepared for the Cabinet Office—unless the birth rate can be nudged up (or the Japanese can overcome their dislike of immigration). A special unit in the Cabinet Office is now working on measures to persuade young Japanese families to do their bit. It is considering things like bigger family allowances, more favourable tax treatment of families and many more nursery places to shorten the long waiting lists. To put more steam behind such initiatives, the government in 2005 appointed a minister for gender equality and social affairs, Kuniko Inoguchi. She has been a tireless campaigner for Japanese women, though her job soon fell victim to a change of government.”

Earlier this year, the Japanese government added $1.5 Billion to its budget to help working mothers with child-care spending [“For Japan’s Young Families, a Little Good News,” by Blaine Harden, Washington Post, 18 April 2009]. Desired objectives from the child-care program are two-fold: first, keep women in the work force, and, second, encourage women to have children. Most analysts believe that it is too little too late.

“The number of children here has fallen for 28 consecutive years. Japan has the world’s lowest proportion of children younger than 15 and the highest proportion of people older than 65. Population loss will strip away 70 percent of the workforce by 2050, according to a recent forecast. Japan desperately needs its young women to marry, have children and remain in the workforce. But women are postponing marriage and delaying childbirth as never before. After they become mothers, only about a third of Japanese women return to work, compared with about two-thirds of American women. The squeeze on working women with children is quickly becoming a vise on corporate profits and a dire threat to Japan’s social well-being, according to Japan’s largest business federation, the traditionally conservative Nippon Keidanren. In an eyebrow-raising report this year, the federation implored the government to use the economic crisis as an opportunity to invest $10 billion to build day-care centers for 1 million children who need placement in them.”

In the midst of all this gloomy demographic news in developed countries, a ray of light has broken through [“In Reversal, Highly Developed Nations See Rise in Fertility,” by Rob Stein, Washington Post, 10 August 2009]. He writes:

“For decades, the rate at which women were having babies in many of the world’s most highly developed countries slowly declined. While the trend cheered some environmentalists worried about overpopulation, it stoked increasing concern among policymakers, demographers and social scientists about the long-term impact on societies as their populations aged and sometimes began to shrink. Now, however, new research has produced the first glimmer of hope that economic prosperity may not be linked to an inexorable decline in fertility. The new analysis has found that in many countries, once a nation achieves an especially high level of development, women appear to start having more babies again.”

For years demographers have noted that birth rates fall as incomes rise. As The Economist puts it:

“One of the paradoxes of human biology is that the rich world has fewer children than the poor world. In most species, improved circumstances are expected to increase reproductive effort, not reduce it, yet as economic development gets going, country after country has experienced what is known as the demographic transition: fertility (defined as the number of children borne by a woman over her lifetime) drops from around eight to near one and a half. That number is so small that even with the reduced child mortality which usually accompanies development it cannot possibly sustain the population.” [“The best of all possible worlds,” 8 August 2009 print issue].

Normally reduced birth rates are seen as a good thing because women having fewer children means that those children are healthier and better educated. Taken to the extreme, however, a situation develops like the one being faced in Japan. That is why the new study is receiving a lot of attention. Stein continues:

“To explore whether economic development is necessarily linked to falling fertility, Kohler and his colleagues examined fertility trends between 1975 and 2005 in 37 of the most developed countries. They used a measure developed by the United Nations known as the human development index (HDI), which combines income data with other measures of advancement, such as longevity and education levels. Fertility rates did tend to decline as a nation’s HDI rose, the analysis showed. But for 18 of 26 countries that crossed a certain threshold of development — an HDI of at least .9 — their fertility rates began to rise again. … The timing of the turnaround varied from country to country. In the United States, for example, the turnaround occurred in the mid 1970s. In Norway, it happened in the early 1980s. In Italy, it was in the early 1990s. The cause remains unclear. But Kohler speculated that once countries reach a certain level of development, they can afford changes that enable women both to work and have children. Many Scandinavian countries, for example, created generous welfare systems that include free day care. In the United States, women’s salaries rose enough to make paying for child care more affordable. Although the analysis did not specifically examine the impact of immigration on fertility rates, Kohler said other studies indicate that while immigration may play some role in the increases in fertility in countries that reach a high level of development, it would not explain all of it.”

Japan is one of the outliers in this trend, but Hans-Peter Kohler, a professor of sociology at the University of Pennsylvania who helped conduct the research, “speculated that stubborn gender inequalities in Japan may create roadblocks to women working and having children.” Another surprising outlier is Canada, with no obvious reason why. Kohler admits the study doesn’t answer the question of why birth rates rise after countries reach a high level on the HDI scale, but he believes it’s a good sign.

“Whatever the reason, the trend appears to be working for many countries. The United States recently achieved replacement-rate fertility and some countries, such as Norway and France, are now approaching a replacement rate again. Many countries, such as Italy and Spain, continue to have very low fertility rates. But at least they are headed in the right direction, Kohler said. ‘This shows that having families is something that continues to be highly valued in advanced societies. As we become affluent and developed, children are likely to remain an essential part of an individual’s life. The family is not necessarily on its way out.'”

The notion that families are good for society has long been considered a quaint religious notion. But as James Surowiecki noted a number of years ago, there is a growing belief that children should be seen as a “public good” [“Leave No Parent Behind,” The New Yorker, 18 August 2003].

“In a sense, children are what economists like to call a ‘public good,’ like national defense or scientific research. The essential characteristic of a public good is that everyone benefits from it even if not everyone pays for it. Government usually plays a valuable role in making sure that a public good is paid for. This doesn’t mean that the state has to take over driving the kids to soccer practice—or, God forbid, require each couple to have 3.2 ‘Heroes for the Homeland’—but it should certainly help spread the financial burden of raising a family. There may be some sense after all in having those taxpayers who don’t have children subsidize those who do, and there’s little sense in cutting back on programs like Head Start. All of us, it turns out, have an interest in improving public schools. It may not take a village to raise a child, but these days it seems to take a village to pay for one.”

In discussions about Development-in-a-Box™, I often stress the importance of investing in human capital. There is no more important human capital than our children. Children need to be educated and raised in a safe, healthy environment. Adequate job availability helps make an environment safe in developing countries. In developed countries, good child care is as important as jobs. Demographic trends will certainly be something to watch over the next few years as the economy tries to get back on its feet.