Blog Post

Demographics and Long Run Growth

Scholars have been investigating the relationship between demographics and long term growth, in the context of the secular stagnation hypothesis. We review recent contributions.

By: and Date: June 18, 2018 Topic: Global Economics & Governance

Cooley and Henriksen argue that demographic factors cannot fully account for the slowdown of long-run growth, but they likely represent an important contributing factor. Demographic change is persistent and predictable. Across the most advanced economies, average age will increase and life expectancy will almost surely increase. This may have important consequences for long-run economic growth. Economic policies that strive to mitigate the effects of ageing on long-run growth will have to target households’ incentives to supply capital and labour over their life-cycles; in particular late-working-life labour supply.

In a podcast interview, Hal Varian says that if technology cannot boost productivity, then we are in real trouble. Thirty years from now, the global labor force will look very different, as working age populations in many countries, especially in advanced economies, start to shrink. While some workers today worry they will lose their jobs because of technology, economists are wondering if it will boost productivity enough to compensate for the shifting demographics—the so-called productivity paradox. Varian thinks there are three forces at work. One of these is the investment hangover from the recession, as companies have been slow to reestablish their previous levels of investment. The second has been the diffusion of technology, the increasing gap between some of the more advanced companies and less advanced companies. And third, existing metrics are facing some strains in terms of adapting to the new economy. Varian believes demographics is important, particularly now that baby boomers, who made up most of the labor force from the 1970s through 1990s, are retiring but will continue to be consumers.

Ferrero, Gross and Neri thinks that demographics matter for secular stagnation and low interest rates. They develop a dynamic panel model for the euro area countries, and conduct a backward-looking counterfactual scenario analysis by assuming that dependency ratios behave more favorably than they did over the 10-year period from 2006-15. In addition, they also present a forward-looking counterfactual assessment, assuming that the dependency ratios move in line with the quite adverse projections by the European Commission, along with more favorable alternative assumptions over the 2016-25 period. In both cases, the counterfactual projections suggest an economically and statistically relevant role for demography. Interest rates would have been higher and economic activity growth measures stronger under the assumed more favorable historical demographic assumptions. Concerning the forward-looking assessment, interest rates would remain at relatively low levels under the assumption that demography develops as projected by the EC, and would rise visibly only under the assumed more favorable forward paths for dependency ratios.

Earlier research by Gottfries and Teulingens argued that demography has played an important role in reducing the interest rates. The increase in life expectancy, which has not been offset by an increase in the retirement age, has led to an increase in the stocks of savings. The latter will go into price increases for assets in fixed supply – such as housing – rather than in adding new capital. Potential remedies for absorbing the extra savings are increasing the retirement age and an extension of the pay-as-you-go benefit systems. Similarly, Aksoy, Basso, Grasl, and Smithargued that population aging predicted for the next decades is found to be a significant factor in reducing output growth and real interest rates across OECD countries.

But this is not an universally agreed conclusion. Earlier research by Favero and Galasso argues instead that demographic trends in Europe do not support empirically the secular stagnation hypothesis. Their evidence shows that the age structure of population generates less long‐term growth but positive real rates. Policies for growth become very important. They assess the relevance of the demographic structure for the choice between macro adjustments and structural reforms and show that middle aged and elderly individuals have a more negative view of reforms, competitiveness and globalization than young. Their results suggest that older countries ‐ in terms of share of elderly people ‐ should lean more towards macroeconomic adjustments, whereas younger nations will be more supportive of structural reforms.

Cervellati, Sunde and Zimmermann take a global, long-run perspective on the recent debate about secular stagnation, which has so far mainly focused on the short term. The analysis is motivated by observing the interplay between the economic and demographic transition that has occurred in the developed world over the past 150 years. To the extent that high growth rates in the past have partly been the consequence of singular changes during the economic and demographic transition, growth is likely to become more moderate once the transition is completed. At the same time, a similar transition is on its way in most developing countries, with profound consequences for the development prospects in these countries, but also for global comparative development. The evidence presented suggests that long-run demographic dynamics have potentially important implications for the prospects of human and physical capital accumulation, the evolution of productivity, and the question of secular stagnation.

Adair Turner argues that the current downward trend in the US fertility rate would be troubling if strong growth and economic confidence required a larger workforce, but the evidence linking births with economic performance in developed countries doesn’t add up, and America has nothing to worry about. As people live longer and healthier lives, retirement ages can and should be increased. And in a world of radical automation potential, which threatens low wage growth and rising inequality, a rapidly growing workforce is neither necessary nor beneficial, and a slightly contracting supply of workers may create useful incentives to improve productivity and support real wage growth.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article Download PDF More on this topic
 

Working Paper

Stability of collusion and quality differentiation: a Nash bargaining approach

How do incentives to collude depend on how asymmetric firms are? For low levels of differentiation, an increase in quality difference makes collusion less stable. The opposite holds for high levels of differentiation.

By: Thanos Athanasopoulos, Burak Dindaroglu and Georgios Petropoulos Topic: Innovation & Competition Policy Date: June 15, 2021
Read article More on this topic
 

Blog Post

The coming productivity boom

AI and other digital technologies have been surprisingly slow to improve economic growth. But that could be about to change.

By: Erik Brynjolfsson and Georgios Petropoulos Topic: Innovation & Competition Policy Date: June 10, 2021
Read article More by this author
 

Opinion

Inflation, inequality and immigration: Spelling the digital recovery with three “I”s

The digital transition offers us a new opportunity to reach out across the global economy - hopefully we will find the strength to use it.

By: Rebecca Christie Topic: Global Economics & Governance, Innovation & Competition Policy Date: June 3, 2021
Read article More on this topic More by this author
 

Opinion

A silver lining for ageing Asia

An ageing population is generally bad news for growth prospects, but Japan and Taiwan offer important lessons.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: December 8, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

Demography and globalisation: reversing trends

A conversation on ageing societies, waning inequality, as well as an inflation revival.

By: The Sound of Economics Topic: Global Economics & Governance Date: October 21, 2020
Read article More on this topic More by this author
 

Opinion

The pandemic will structurally change the global economy more than we think

It is time to rethink many of the basic principles of our economic model to mitigate the impacts of the COVID-19 pandemic.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: October 20, 2020
Read article Download PDF More on this topic
 

External Publication

Diversification and the world trading system

Diversification is important because it is associated with economic growth and reduced volatility.

By: Mohammed Al Doghan, Abdelaaziz Ait Ali, Muhammad Bhatti, Carlos Braga, Uri Dadush, Abdulelah Darandary, Anabel González and Niclas Poitiers Topic: Global Economics & Governance Date: September 16, 2020
Read article More on this topic
 

Blog Post

Three macroeconomic issues and Covid-19

COVID-19 raises a number of serious issues of a sanitary, social and economic nature. While recognizing the difficulty of giving definitive answers at this early stage, we attempt to shed light on three critical macroeconomic topics.

By: Leonardo Cadamuro, Francesco Papadia and Bruegel Topic: European Macroeconomics & Governance Date: March 10, 2020
Read article Download PDF More on this topic More by this author
 

External Publication

Factors determining Russia’s long-term growth rate

This paper’s main conclusion is that Russia’s economy cannot grow at the pace recorded in the early and mid-2000s because of the different external environment, the different stage of development and serious demographic headwinds.

By: Marek Dabrowski Topic: Global Economics & Governance Date: January 16, 2020
Read article More on this topic More by this author
 

Opinion

Could the U.S. economy be experiencing a hidden tech-driven productivity revolution?

In the last decade, most advanced economies have grown more slowly than before. Slower growth has frequently been seen as a legacy of financial crises, especially that of 2007–2009.

By: Marek Dabrowski Topic: Innovation & Competition Policy Date: January 6, 2020
Read about event More on this topic
 

Past Event

Past Event

Improving regulatory policy formulation and institutional resilience in Europe

Are large differences in the resilience of individual economies related to differences in the quality of country-level institutions that shape the absorption and response to these shocks? At this event we'll discuss the evolution of labour markets, and the role of institutional design and good process.

Speakers: Arup Banerji, Maria Demertzis, J. Scott Marcus, Céline Kauffmann, Rogier van den Brink and Bruegel Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 13, 2019
Read article More on this topic
 

Opinion

Upbeat outlook from Chinese banks' profits masks growing problems for small banks

The performance of Chinese banks has been resilient so far, despite decelerating growth. While the performance of large banks remained steady, the rebound came from small banks. Why have small banks rebounded and is the rebound sustainable?

By: Alicia García-Herrero, Gary Ng and Bruegel Topic: Global Economics & Governance Date: November 12, 2019
Load more posts