SWBP: Lack of People of Working Age

SWBP is Solutions for the World's Biggest Problems, a 2007 book I'm reading, edited by Bjorn Lomborg, director of the Copenhagen Consensus. Chapter 18, Lack of People of Working Age, by Robert E Wright and Katerina Lisenkova, both U of Strathclyde, Summary and Commentary

A monster of a problem for Monster.com?

At first glance, this seems like a ridiculous problem, knowing that the average age of humanity (the median age of the world human population) is 28. And I would be right. The best, and most economical, solution, it turns out, is simply letting the younger populations of foreign countries into the states where the working population is graying out.

The problem, to be precise, is that 95% of the employed population in industrialized countries (namely N. America, Europe, Russia, Japan, Australia, and NZ) are aged between 20 and 65, a cohort whose size will plummet if current demographic trends continue: specifically, 80 million employees over the next 4-5 decades.

The chain of causation, without a policy remedy, runs from an implied upward pressure on wages, to less domestic and international competitiveness, lower economic growth, lower tax revenues to fund services for an ageing electorate, possibly raised taxes, and then even lower rates of economic growth.

In industrializing countries, however, the 20-65 age group (the 'traditional labor force'; I'll call it tlf) will be growing by over 1.5 billion (about 60%) between 2005-2050. So a transfer from excess supply of workers to excess demand seems called for.

This chapter also points out that not only will the number of the tlf be diminishing, but the distribution of those still in the workforce will be ageing, as well. Without fresh supply, this increase in older worker supply and decrease in younger worker supply means 1) wages for younger workers will increase, while wages for older workers will decrease, and 2) if labor markets don't adjust, then population ageing will generate unemployment, potentially for older and younger workers alike, resulting in lower economic growth.

Actually, the labor force, according to recent UN population projections, will be growing in industrialized countries until 2010, when a steady and substantial decline will occur over the next 40 years, so that by 2050 100 million people, or 10% of the labor force, will leave work. Using a U of Strathclyde econometric model, this 10% decrease is associated with a 5.6% lower level of output, which, using a 2010 tlf baseline, 40 year time-horizon, and 3 and 6 percent discount rates, would mean a dollar value loss of 19 trillion or 8 trillion, respectively.

That's a fair amount of cheddar.

Solutions
1. We could ask our populations to make more babies. But most industrialized countries have experienced below replacement level fertility for at least 3 decades, and it seems unlikely to exceed replacement level anytime soon. Without migration, the population structure will stabilize, i.e. the share of the population across different age groups will be virtually constant.

2. So another solution is to 'ride out the storm.' It's a temporary phenomenon. They say this is a 'policy' not currently advocated by any government, as it would be politically dangerous in countries with democracy (because?) It is argued that low rates of economic growth are needed to generate improvements in standard of living, with a stabilized populaton structure (I can't say I understand, exactly -why wouldn't that be true for an "unstable" population structure? And can't you improve your happiness, your standard of living, on less income...living more frugally? For example, I know I enjoyed a blackout, myself, because we went outside and talked to neighbors, and almost started a campfire. If we really hashed out the minimum amount of money to live healthy and happy lives, we'd rock. Still, the authors seem to think it isn't practical).

3. With fewer workers supporting an increasing number of those not in work, labor productivity must increase. Human capital investment, as it is called (or education and training), across all ages (lifelong learning), to produce skill-intensive production, is required, they say.

4. Increase the tlf participation rate. For example, employment and labor force participation (what's the difference?) rates for women with pre-school and school-age children are still low. A shortage of affordable day-care and other child services makes it financially irrational for them to work. A cultural shift to one like in the Scandinavian countries, where 'family-friendly' policies enable parents (particularly mothers) to combine child-rearing and employment, would be beneficial.

5. Finally, immigration. An immigration system can be devised that matches people to jobs. And return migration can be significantly reduced through payments. Even giving each migrant $100,000 has a benefit-cost ratio of 4.1 or 3.3, at 3 and 6% discount rates, respectively. I hope we wouldn't create a future problem, though, in which we have demographic difficulties pushed further down the line.

6. Okay, I lied. Penultimately, labor market reforms. "In many industrialized countriesm labor markets are regulated, and adjustment is at best slow and hampered. In such countries, reforms (regardless of their political unpopularity) aimed at 'freeing up' the labor market would be desirable.'

7. Now, finally: Increase the age of retirement. With increasing life expectancy (and vigor around retirement age), the age of retirement at 65 is often seen as too low. This would have massive political ramifications, they say (although I'm not clear on what these would be). Wages might perhaps be considerably lower, and some people would be forced to work to an older age, to receive a pension, while some would welcome the opportunity to work longer, for a variety of reasons.

Conclusion
An increase in pensioners, and decrease in workers, is a recipe in need of a solution, probably a mix of the above ingredients. Increasing immigration seems the most likely, as it clearly has the lowest direct cost to taxpayers.