Mass effect: the employee shortage

Rising longevity and plunging birth rates have pushed the world into an unprecedented demographic trial with colossal implications

 
Mass effect: the employee shortage
The population has continued to rise as a result of rapid advancements in medicine 
Author: Elizabeth Matsangou
April 17, 2017

Not too long ago, the biggest concern in terms of demographics was the exponential global burden of overpopulation. With millions already dying from starvation and acute poverty, the notion of adding billions more to the roster without triggering further human suffering seemed nothing short of ludicrous. As for the planet itself, given the rapid depletion of fossil fuel reserves, as well as the damage inflicted in order to feed ever-expanding populations, the consequences were deemed to be catastrophic.

According to Jane Falkingham, Professor of Demography and International Social Policy, and Director of the ESRC Centre for Population Change: “In the 1970s, when the global population passed the four billion mark, some academics, such as Paul Ehrlich, were arguing that there was a ‘population bomb’ and the world was ‘minutes away from famine’. However, these doomsday scenarios did not transpire, as technological innovations changed the way we manufacture goods and the ‘green revolution’ increased yields and agricultural productivity.”

When people are more productive, they can earn more, pay more taxes and save more, creating a beneficial cycle for the economy

The rapid advancement of medicine, together with a corresponding decline in infant mortality rates, has resulted in people living far longer. Such developments have coincided with sociological trends that now see people leaving it later to have children, while having fewer when they do so. Consequently, ageing populations are the demographic challenge du jour.

The number of economies facing this issue is rising, tipping the entire planet into an unprecedented state of affairs. “According to the UN population division, which is sort of the font of all wisdom on population and demographic matters, with a handful of exceptions global population growth is basically grinding to a halt”, said George Magnus, economist and expert on global demographic trends.

Ageing population
Falkingham told World Finance: “In 1901, average life expectancy for a man in [the] UK was 45. By 2001, it was 75 years – a rise of 30 years in 100, equivalent to three years every decade, or 3.6 months a year, or two days a week, or around seven hours a day! These improvements in life expectancy reflect advances in medicine and public health, as well as rising standards of living, better education, improved nutrition and changes in lifestyles.”

As a result, population ageing has ensued, with one especially large generation making the phenomenon all the more visible: the baby boomers. According to the UN report World Population Ageing 2015, the portion of the global population aged 60 years or older increased by 48 percent between 2000 and 2015. By 2050, it is expected the number will have tripled since 2000.

“It’s a bit like watching a snake eat its prey: you can watch the prey work its way through the snake’s body”, Magnus explained. “In a way, the baby boomers are the ones who are at the bulge in many societies, and that bulge is gradually working its way through working age. A good part of it is entering, or has already entered, the period of retirement, and that will continue for a considerable period of time.”

By the middle of this century, no age group is expected to swell as fast as that of the over-60s. Furthermore, those within that group will become increasingly aged as well: the UN report forecasted that, between 2030 and 2050, the share of the globe’s population aged 80 years or over will increase from the current level of 14 percent to more than 20 percent.

At present, developed parts of the world hold the most concentrated shares of older citizens, with as many as one in four citizens being aged 60 or over (a figure that is expected to rise to one in three in the foreseeable future).

Interestingly, this shift is also expected to take place in developing nations, with the portion of people aged over 60 rising from the current 5.5 percent of a population to 9.8 percent by 2050. As this is the same percentage currently seen in advanced economies, the movement signifies a challenge truly global in scope (see Fig 1).

As Falkingham noted, such developments have significant consequences: “Rapid changes in age structure make it more difficult for societies to adjust, and the speed of population ageing has important implications for government policy in the fields of health and social care, and pensions. Some countries of the global south are growing old before they grow rich, presenting an additional challenge to the development of systems of social protection.”

In extremely poor developing countries, it is common for families to have numerous children as something of an insurance policy: by doing so, parents can better ensure a few of their offspring will survive birth and childhood, and in adulthood at least one will earn a good enough wage to care for their elderly parents. Naturally, this approach falls in parallel with economic growth: as an economy develops, child mortality declines and personal incomes grow. In correlation, fertility rapidly falls.

In the past, birth rates have been reduced due to widespread diseases, or conflict and war. Yet, today, it is cultural norms that have caused the drastic reduction in the number of children that people are having. Magnus added: “This is a unique phenomenon in human history.”

In advanced economies, individuals now consider numerous other factors when planning a family, such as the kind of education and lifestyle they can provide for their children; more often than not, these are better when offspring are fewer in number.

Dwindling workforce

As equality in the workplace improves and better career opportunities are afforded to them, women are leaving it later to start a family. This factor can account for Japan’s low birth rate, which is currently 1.4 children per woman – far lower than the 2.1 average needed to ensure the country’s long-term economic stability. For the country – which also has the most aged population on the planet, with 33 percent aged 60 or older – there is a mounting pressure on both the state and those of working age.

30 years

The increase in life expectancy in the UK over the past century

48%

The global increase in people aged 60+ between 2000 and 2015

1.5m

The number of skilled immigrants required to sustain Germany’s state pension system

83%

of Norwegian mothers with young children are in employment

“The definition of working age is a bit of a moving feast nowadays”, Magnus told World Finance. Traditionally, this term encapsulated those aged between 15 and 64, with pensions being available from the age of 65 since Prussian statesman Otto von Bismarck introduced the idea of government-supported retirement in 1881.

However, with increasing numbers of people staying in education for longer and more opportunities for workers to retire early, the working age range is now shrinking in many developed states. Magnus explained: “Assuming, just for the moment, that we’re talking about the 15 to 64-year-old age group, this age group is coming under a lot of pressure, because at one end of the cohort – the over-65s – that group of people in society is doubling over the next 20 or 30 years, and the number of workers who are growing up to replace them as they retire is shrinking very slowly, because we’re not having enough babies to grow up to become workers.”

The working age group is the faction that overwhelmingly creates economic value within society: they have the jobs and the income, they create wealth, and they purchase goods and services, while older individuals remain dependant on them to provide the tax revenues they need for their healthcare, pension payments and so on. Not only does the burden on those of working age and the state both increase in ageing populations, but economic growth also suffers.

Companies feel the pinch of both fewer workers and customers. The latter is significant in accumulation, particularly as consumption patterns begin to shift, with demand moving away from durable goods such as electronics and cars towards services such as healthcare and nursing homes. The consequence is a shrinking demand for jobs in certain areas and growth in others – both of which can be exponential. In the US, for example, the domestic construction industry is already suffering both from shrinking demand as a result of a declining home ownership rate, and labour shortages due to the retirement of baby boomers.

Saving habits also change as people grow older. During their 20s and 30s, people are far more likely to borrow and spend more on their homes, children and careers. By their 40s and 50s, however, such obligations lessen, while incomes are also likely to be higher, meaning people begin to save more, particularly as retirement looms. When that time does come, over-65s use their savings, together with state support, to live. When accreted, this shift can have a significant impact on an economy, causing growth to slow as consumption falls. Though higher savings in an economy may serve to increase investment and cause faster output growth as employment rises, this rate will eventually plateau.

Experience is king: Japan boasts one of the highest proportions of older workers in the world

Demographic dividend 
Magnus told World Finance: “The so-called ‘demographic dividend’ is a phase that demographers have identified, where youth dependency is declining, the working age population is swelling, and… the over-65 cohort of the population has [not yet] begun to expand – so this is otherwise known as the ‘sweet spot’.” This phase occurs when the population bulge is of working age and is having fewer children, but at the same time there lacks a substantial increase in the number of elderly dependents. The state therefore benefits from a high number of people saving and consuming more, while also paying more taxes, yet without having the growing burden of pensions and healthcare.

Numerous western economies have enjoyed the demographic dividend and benefited immensely from this incredible window of economic opportunity. Further afield, China is an excellent example of exploiting the sweet spot to phenomenal success: in doing so, the country propelled its economic development forward at a simply astronomical rate to become the second biggest economy in the world.

Despite the importance of this dividend for numerous emerging economies with youthful populations, there is a risk of missing out on it all together. Magnus pointed to one example in particular: “We only have to think back to the Arab Spring to be reminded about what potentially can happen if you have a lot of young people growing up without hope and without aspiration for employment… The demographic dividend, in other words, is really only something that can be exploited successfully if you have a strategy to put people to work, otherwise it just gets wasted, and if push comes to shove, it can end up in disruption, conflict and violence.”

As Magnus noted, we cannot assume that, say, India and Brazil can and will successfully exploit it. “I think it’s certainly a mistake to say it’s a foregone conclusion”, he said.

International aid
The fastest and perhaps most obvious way in which the working age population can swell is via immigration. Through policies that encourage an influx of young workers, pressure is reduced on those in the middle and, in turn, the reliant cohort of elderly individuals. However, there is considerable social and political opposition to inviting droves of immigrants into a state: long have ‘foreigners’ been accused of stealing jobs and placing undue stress on public services. This hostility has only worsened of late in many countries – an unfortunate consequence of the ongoing refugee crisis, which has crystallised in a handful of European countries in particular.

One such country is Germany, western Europe’s chief recipient of Syrian refugees. Interestingly, Germany also faces the worst case of population ageing in the region. According to a study by Hamburg’s World Economy Institute, not only is Germany’s birth rate now the lowest in the world, it is also declining faster than that of any other industrial country (see Fig 2).

Moreover, it is estimated that approximately 1.5 million skilled immigrants are required to sustain Germany’s state pension system; by 2060, two workers will be needed to support every retired person in Germany. Yet despite this very real and looming problem, when Chancellor Angela Merkel agreed to receive more refugees in 2016, she was met with public outrage.

Aside from the social backlash, though immigration may be the fastest solution, the difficulties with which such policies can be applied are numerous. Helping newly arrived citizens to integrate into a population, particularly given language barriers and cultural variances, is both costly and difficult to implement successfully. However, a failure to do so can lead to growing unemployment and even rising levels of crime if the newly arrived immigrants are not afforded the opportunities they require in order to positively contribute to the economy.

For governments hoping to improve their existing labour participation rates, another approach is to increase the numbers of those who are traditionally under-represented – namely women and older people. While such a move can be met with opposition, there is a clear logic behind it.

As Magnus explained: “It’s perverse, but it’s not an accident that the countries that have the highest participation rates of women at work also have the higher fertility rates… You wouldn’t normally think that’s the case, but it is; the link really is ubiquitous and readily affordable childcare. Scandinavian countries, for example, have quite high female participation rates [see Fig 3], and they also have the most generic forms of affordable childcare.”

A far cry from the former fears of a population bomb, today’s biggest demographic challenge is that the young are too few and the old too many

According to the OECD, while the number of women in a workforce is determined to an extent by labour market conditions, cultural attitudes and female participation, certain policies, such as flexile working arrangements, childcare subsidies, paid parental leave and child benefits, are also crucial.

Female employment is incredibly important for a country’s ongoing economic growth. Moreover, it will prove vital as populations age and governmental expenditure on pension schemes and age-related ailments mounts. In order to include more women in the workforce, attitudes towards them in the workplace need to improve, and glass ceilings must be removed.

As evidenced by Scandinavian countries, putting measures in place that allow women to have both careers and families is essential. Of course, promoting female employment while also bolstering a country’s birth rate is no mean feat, particularly as the two seem so at odds with one another.

Norway, though, is an excellent example of how individuals can combine their personal and work lives with great success for the economy. According to the OECD Observer, around 83 percent of mothers with small children in Norway are in employment, while both fertility rates and labour participation have steadily risen since the 1970s. Today, the Norwegian fertility rate is 1.9 children per woman, one of the highest in Europe.

This success began when the country experienced an increase in labour demand as a result of its economic growth, which was simultaneous with greater educational attainment among women. Interestingly, this has become a cycle that feeds into itself: greater labour supply means more revenue from taxes, which in turn means more state money can be ploughed into services such as childcare and support for working mothers. With more help from the government, more women are more likely to work.

Experience with age
There is also the option to encourage older people to participate in the workforce. This has already started to gain momentum in western countries, though it is in its early stages and is still disregarded by many. In Europe, if given the opportunity, individuals are more likely to retire early – to do so is widely regarded as ‘the dream’. In Japan, on the other hand, experience is king. There is a great deal of respect for the aged, which explains why the proportion of older workers is much higher than in other countries. Again, attitudinal changes are required for a shift to take place, which will be aided by the automation of processes that will enable people to work longer.

Magnus explained that another method for boosting a country’s economy is to increase productivity: “If only it were a light switch that you could switch on from one day to the next… If tomorrow’s working age population is more productive than today’s, then we may have already advanced a long way into resolving the problem.” As underlined by Magnus, when people are more productive, they can earn more, and when they earn more, they pay more taxes and save more, thereby creating a beneficial cycle both for the individual and the economy.

He continued: “So innovation – it always has been our salvation. From the invention of the wheel to the jet engine and the internal combustion engine, and so on and so forth.” In order to spark innovation, however, governments must make greater investments into education, research, funds and the like. “The future really is, in my view, about investment in human capital and in new products and processes.”

A far cry from the former fears of a population bomb, today’s biggest demographic challenge is, in simplistic terms, that the young are too few and the old too many. Significantly, this is not a problem limited only to wealthy countries; it is one that is global in scale and set to worsen in the coming years. Yet despite the terrifying figures being brandished and corresponding alarm regarding economic decline, this demographic challenge does have viable solutions. The road that each country chooses to go down will be individual and specific to its own internal circumstances and challenges, whether that means inviting more migrant workers or pushing up the pensionable age. In any case, the best solution – as always – lies in our saviour: innovation.