NBER working paper: Demographic Dividend to Demographic Drag

2 mins read
August 28, 2023
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What’s going on: As countries keep aging and aging, regardless of wealth, an aging population is causing problems. Past and current leaders thought an increased working-age share due to aging has boosted economic growth while minimizing investment in schools and other social services. However, shrinking working-age shares have turned this demographic dividend into a drag. A recent working paper, Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag? by Rainer Kotschy & David E. Bloom, delves into the implications of this shift in working-age shares on economic growth, projecting the income per capita from 2020 to 2050.

Key Findings

  • Demographic Drag and Economic Growth: The study confirms demographic drag will be standard in forthcoming decades, but economic growth also depends on labor potential alterations due to increased longevity and functional capacity. Contracting working-age share will slow economic growth, but available capacity enhancements can alleviate much of this deceleration. Hence, population aging’s impact on economic growth may be less drastic than predicted.
  • Insufficiency of Migration and Technological Progress: Although they can alleviate labour shortages, automate tasks, and create age-friendly jobs, migration and technological progress are insufficient to neutralize the demographic drag. Therefore, significant potential lies in policies enabling older individuals to remain economically active, including non-market productive activities.

Policy Implications

  • Encouraging Economic Activity in Older Individuals: Policies like employment incentives, safe workplaces, adequate healthcare, retirement safety nets, reducing social inequalities leading to ill health, and accommodating caregiving responsibilities can have a substantial impact.

Troubled Waters

  • Projection Uncertainties: Projecting population ageing effects on economic growth involves uncertainties due to unpredictable factors like technological innovations, climate change, pandemics, and wars.
  • Alternative Measures: The study assumes prospective measures of population aging reflect age-specific functional capacity variation, but alternative measures may capture this variation more effectively.
  • Fiscal Implications: The analysis does not consider population ageing’s budgetary implications, which might necessitate tax increases that further slow economic growth.
  • Distributional Differences: The study does not account for economic activity distributional differences around old-age thresholds, which may have distributional and related welfare implications.

Our Thoughts: The global economy is anticipated to decelerate due to a decline in the number of individuals of working age. Nevertheless, the study reveals that enabling people to be more productive and work efficiently can diminish this detrimental effect. Yet, addressing the challenges of demographic shifts entails more than merely relocating people or advancing technology. A comprehensive approach involving a broader range of policies, beyond simply assisting the elderly to work, is necessary.

We seen

The Bottomline: This study provides crucial insights and a stern caution for leaders aiming to benefit from an artificial demographic dividend. However, it is essential to bear in mind the inherent unpredictability in forecasting the impact of an aging population on economic expansion. It is also important to explore alternative strategies, assess the implications on government finances, and consider the diverse effects on various population segments to comprehensively grasp the situation.

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