ANZ Research’s report, ‘Demographic time bomb? Time to question conventional wisdom’ highlights we do not anticipate an impending demographic crisis. Changing demographics affect how economies ‘age’ but the outcome is not set in stone.
Here are five reasons why we believe changing demographics are not necessarily bad news.
1. Demographic predictions can be wrong
It wouldn’t be the first time. Demographic trends are not easy to forecast, despite the apparent smoothness and linearity in the trends we see, and things we now assume to be norms can easily become surprises.
2. Trends aren’t static, they’re responsive
While demographic trends can appear to be linear, that doesn’t preclude adjustment. Sociological and technological changes shape future demographic trends and affect economic outcomes.
The latter half of the twentieth century provides a clear contrast: between 1948 and 1990, the rise in female participation contributed about half a percentage point per year to the potential growth rate of GDP.
Today, there are some hopeful signs of progress, sometimes in unexpected places. Female labour force participation is now higher in Japan than the US, for example. Yet it’s also clear that there’s great potential that remains untapped. As Ivanka Trump and Jim Yong Kim recently noted only 55 per cent of women participate in the paid workforce globally, depriving the world of billions of dollars of economic activity each year.
We’ve argued previously that in Asia, such a renewed push could create a second ‘demographic dividend’ just by enabling women to work in greater numbers, adding 314 million employees to the labour force in the region.
Those who might fret that such incremental change is too small to be of consequence, should also consider that diverse and unplanned societal shifts can provide grist for government policy changes that in turn further hasten change, in a kind of reinforcing feedback loop.
In Japan, a corporate culture that traditionally forced employees out at age 60 gave way to contemporary realities in 2013, when legislation was enacted requiring companies to keep on all workers who wish to continue working until 65. The country is working to gradually raise the retirement age from 60 to 65. In Australia, the participation rate of those aged over 65 has doubled in the last 15 years, and discussions are under way to gradually raise the retirement age to 70. In Brazil efforts are in place to raise the retirement age from the 50’s, to 65. We could go on.
3. Technological innovation is challenging workforce assumptions
According to a recent paper, ‘Secular stagnation? The effect of aging on economic growth in the age of automation’, the big story here may already be underway.
Surveying OECD data, the authors demonstrate that countries with ageing populations are likely at the forefront of adopting robots.
They suggest that, where capital is abundant and cheap labour scarce, technology can fill the gap and even lead to higher economic growth.
There have also been subtler technological changes in the last few years that invert the assumption that ageing must equal vanishing productivity.
A study by Harvard Business Review on working from home found that older workers were most likely to benefit, as they have established commitments outside the workplace. In contrast, the social lives of younger workers are more closely tied to their workplace (and they may need closer mentoring and direction). Making productivity less contingent on physical presence may hold promise for ageing white-collar workers but that may be a bit trickier for those whose work can’t be so neatly divided from bodily health.
4. Young people are ahead of the game
The falling participation rate for young people actually carries a silver lining. It indicates that young people are taking time to study to meet the increasingly sophisticated requirements of the labour market. In fact education is, in many ways, the way that we have always stayed ahead of machines.
In Australia last year youth participation in full-time education rose to a record high of 52.44 per cent. The proportion of workers in Australia who hold a bachelor’s degree or higher rose from 23 per cent in 2005 to 31 per cent in 2015 and the unemployment rate for those with a bachelor’s degree or higher was 3.4 per cent versus 7.7 per cent for those with only Year 12 education.
By spending more time in school, young people have already indicated a way that demographic change may be managed.
The final factor that affects how economies ‘age’ is immigration, and potentially the movement of people from poorer countries with younger populations to wealthier countries with ageing populations.
Immigration is more than just about ‘replacing’ people. It is about injecting ideas and expertise to strategically boost sectors that are vital to a country’s future.
The world is changing. Don't lose sight of the upside
And that brings us back to the big picture. There are a range of factors which may have reduced trend economic growth in many economies over the past decade, but in our view demographics is one of the least worrying. We should not assume that today’s ageing demographic profile necessarily leads to slower growth or economic problems.
While many investors, businesses, and financial markets now presume that this is the case, it’s time to think more critically about this issue. There are plenty of reasons to question conventional wisdom and the definitions of the ‘working age’ population’.
Richard Yetsenga is chief economist at ANZ