In Masson and Tyron’s “Macroeconomic Effects of Projected Population Aging in Industrial Countries” (1990) and Johnson and Falkingham’s “Aging and the Macroeconomy” (1992) both studies examine the impact of the aging population of industrialized countries on their own economies. In both of the studies the authors focus on the age cohort known as the “baby boom” generation and the impact their future retirements will have on the economy. The industrialized countries that they focus on is the Group of Seven, which includes the United States, Germany, Japan, France, England, Italy, and Canada. The studies focus in on the economic effects that the baby boomers retirements will have on consumption, production, the savings rate, and government expenditures within the next 10-15 years.
In both of the articles, the authors spend a fair amount of time discussing how the people in different age groups has been changing quite rapidly over the past ten years. From 1990-2000 the U.K. was expected to see the number of 20-29 year olds drop by nearly twenty percent, as a result there was an increase in the number of people in their thirties and fifties. In Germany, the low fertility that occurred in the 1970s will result in a drop of the younger population by nearly a third. In the United States the population has also become older with an increase of 40 to 60 year olds, and a 15-20 per cent decrease in the population aged from 25 to 29. The baby boom generation is expected to retire in the years 2010-2025, which will result in a significant decline to the number of people employed relative to those that depend on them-or on their own savings.
This ratio is known as the dependency ratio and it captures the labor force implications of the fraction of the population that is either too young or too old to work (p.458).[1] The increase that is expected to occur in the near future will clearly result in a higher dependency ratio. For instance in Japan and Germany the dependency ratios are expected to increase by 13 to 15 percentage points by the year 2025. In the U.S. the ratio is expected to increase by 7 percentage points.
Such a dramatic change to the age structure of the population will result in a change in the level of demand within each economy. Therefore the changing age structure among consumers may certainly force producers to make marginal and non-marginal adjustments in order to deal with the changing demand preferences within each consumption sector.[2] Johnson and Falkingham describe how an example of a marginal change that producers might have to make is switching over from the production of prams to wheelchairs. Yet more serious changes may deal with what to do with the possibility of vacant schools or children’s youth amusement parks so that they can be of use to the ageing population. A problem such as this will require a lot of time and finances in order for it to be resolved.
Goods and service sectors that will seem to be hardest hit by the short-run changes in the age structure of demand are sectors that have large and immutable capital stock. An example of this type of sector that Johnson and Falkingham discuss is residential housing. They discuss to the reader that as the baby boom generation begins to retire they will be followed by generations of smaller families. The effect that smaller families will have on the housing industry is that these smaller families will be less inclined to make the commitment of buying a large house. Yet at the same time as the population grows older their will be an increase to widows and widowers and higher divorce rates, which means that their will be an increase for the demand of single person units for accommodation. Falkingham and Johnson are quick to point out that if real incomes continue to grow as they have over the last ten years then the younger generation of families will still be inclined to buy larger houses even if they do not have large families. Although it is certainly difficult to come up a clear-cut answer to this issue, some studies have been conducted that provide some interesting information. In 1989 Manikew and Weill conducted a study in which they found that real housing prices could fall by nearly 47 per cent from their current prices by the year 2007. This number does not seem as though it is going to hold, yet their basis for the decline in housing prices is because of the decline in the rate of house hold formation. In Europe changes in the age distribution will result in a decrease to the net household formation from 160,000 in 1989 to 40,000 households per annum by 2003. By 2025 the effect of age structure on net household formation is predicted to be negative (Ermisch, 1990).
Because of the large number of people that represent the baby-boom generation, this cohort has pretty much dominated the focus of producers’ attention. In the 1980s this generation was in its 20s and 30s and they were the reason for the consumer boom that occurred. As Johnson and Falkingham describe, they were “the target of advertisers and image makers who created the new icons of modern life- the filofax, the sailboard, the portable phone”.[3] Yet during this decade the purchasing power of the cohort group that is aged between 20 and 40 is going to shrink as the number of American’s in their 40s and 50s will rise by over a third, from 56 million to 75 million. As a result companies are going to be forced to change their marketing strategies as they focus in on an older cohort. Therefore if the baby boomers change their interest in what they consume from say sport cars to sedans, then we will see a large increase in the number of sedan car commercials.
When examining the effects that a changing population age structure will have on the economy it is clearly essential to examine production, especially on the labor force. The low fertility rates of the 1970s and 1980s are a major cause for the shift in both age structure and the size of the working population. This change in the age structure will result in a smaller size of the workforce because older people tend to work less then younger people. The reason why the low labor force participation rates for older workers will probably reduce the size of the total workforce is because the older age groups will see the fastest relative growth over the next thirty years.[4] Because of the decrease in the workforce, by simple economics, production will drop off and so will the total output. The drop in production and total output will lead to an increase on demand because of the shortage of goods. An increase in demand from a shortage in the supply of goods will result in a reduction of output, causing the real exchange rate to appreciate. In both Germany and Japan from 2010 to 2025 real output is expected to fall steadily by nearly 3%. In the United States after 2010 the dependency ratio begins to rise resulting in a decrease in the labor force, lower output, increase in the real exchange rate, and a lower real interest rate. In other industrial countries there is no real affect until after 2020, which is when real output drops off substantially and real interest rates fall.
Johnson and Falkingham in their study also discuss the theory of human capital and how it has grown as a reasonable explanation for the difference in earnings of different workers. Although there are numerous factors that go into this theory, the most common determinant in work experience is age. Numerous studies have concluded that age is positively related to wage rates. Therefore it would seem safe to assume that older workers are more productive than younger workers because of the greater employment experience they have gained with age. However Johnson and Falkingham bring to light that a study was conducted that issued a warning saying that “an aging society might become dangerously unprogressive with falling technical efficiency and economic welfare”.[5] The finding from this study certainly holds some weight because of the belief that younger workers are more technically efficient because they are better adapted to the new technologies due to their more modern and relevant education and training. Because both theories hold some truth Johnson and Falkingham believe that “no direct inferences about the impact of population ageing on productivity can be dawn from age-earning profiles.”[6] They also point out that it is not fair to draw upon conclusions about the economic capacity of workers of different ages. Their reasoning behind this conclusion is that most 60 year olds have the same mental and physical reaction time as most 40 year olds, and that older people can make up for some of the functional decrement of age by working harder the given task.
It is also important to realize that the changes in age structure are probably going to affect the savings rate. Johnson and Falkingham discuss two methods that have been used by economists to predict the effect that the demographic change will have on the savings rate of the Group of Seven. After examining the studies it seems as though from 1980-2025 the changes in age structure will cause a drop in the savings rate of the G-7 by 5 to 12 per cent of GDP. However one of the faults in this study is that it assumes that when the baby boomers are in their mid-sixties they will have the same saving propensities as their parents had during that age. Johnson and Falkingham go on to say that even if aging causes a country’s private savings rate to decline it certainly does not mean that it will have a significant negative long-term impact.
It seems that a direct result of the increase to the dependency ratio as discussed earlier in the paper is that there will be an increase of government spending on medical expenses and pension benefit payments. At the same time, because of the drop in the younger population there is also expected to be a decrease in government expenditures to education. Through tests that have been constructed focusing on this very issue it was found that in Germany real output grows slightly higher because of higher government expenditure yet in other countries output is lower. Therefore there is no common correlation from the effects of a higher dependency ratio in relation to government spending.
When examining the economic effects that population aging will have it is evident that numerous factors must be taken into consideration. However as one thoroughly studies the possible impact of each factor it becomes apparent that there is not much to worry about in having an older population than normal. As long as each country takes appropriate steps in planning for this older population our economy should not falter.
1. Paul Johnson and J. Falkingham, “Aging and the Macroeconomy” in Aging and Economic Welfare, Sage Publications, Newberry Park, California, 1992, Chapter 6, pp.152-176.
2. Paul R. Masson and Ralph W. Tryon, “Macroeconomic Effects of Projected Population Aging in Industrial Countries”, IMF Staff Papers, Vol. 37, No. 3, September 1990, pp. 453-485.
[2] “Ageing and Economic Welfare”, Johnson and Falkingham. (1992)
[3] “Ageing and Economic Welfare”, Johnson and Falkingham. (1992)
[4] “Ageing and Economic Welfare”, Johnson and Falkingham. (1992)
[5] “Macro Effects of Projected Aging”. Masson and Tryon. (1990)
[6] “Macro Effects of Projected Aging”, Masson and Tryon. (1990)