The ageing of the population comes from a mixture of declining fertility and improved health. Healthy ageing is one of the crowning glories of humanity. We have increased global life expectancy by 30 years in a single generation. Unfortunately, it comes at an economic cost. The working age population (16-64) is declining all over the world. At the same time the costs of care for the old are ballooning.

Governments need workers, without whom economic growth relies on productivity improvement alone. Economies all over the developed world are short of workers. The UN forecasts that the populations of 61 countries will decline between now and 2050. Two thirds of the global population now lives in countries where fertility is too low to maintain the population.

The explosion of women working has been one source of workforce and economic growth in the last century. Another alternative is extending working life by increasing the retirement age. Two recent studies in economics have looked at these alternatives.

The Child Penalty

Around the world children negatively affect the employment rate of women. Participation in the workforce changes when women have children. There is always a temporary, but also often a permanent, decline. Women take time out for children and often frequently return part time. Male participation at the time of having a child is around 75% and does not change. Even in households where the women have the higher salary it is they that most often stop work. Participation is lower than men even before children but drops significantly afterwards.

The “Child Penalty Atlas” quantifies the economic impact. It looks across countries and constructs an index. 0% means no impact on female participation when becoming a mother. 100% means all women would stop work for the rest of their lifetime. What is most surprising is the variability. Different counties have very different “child penalty”.

In poorer parts of the world the penalty is low. Women must work after children if their family is to survive. The average penalty across Africa is only 9%. Latin America is at 38% and Europe 29%. North America is on 25%. China is on only 4%. Within Europe there are huge variations. The lowest penalty is Denmark at 14%. The highest is Czech at 50%. Germany is at 41%, the UK at 33% but Spain on 38%. The participation of mothers in the workforce varies dramatically. There must be learnings from understanding these differences. It might fill some of the workforce gap.

The Demographic Drag

The idea of the “Demographic Dividend” has been widely promoted. It describes the confluence of demographic changes. Child mortality drops, more children make it to adulthood. It takes time for couples to adjust their fertility. The result is a baby boom. Initially this depresses economic growth. As those children reach working age there is an upsurge in working people. The population is not yet ageing. The growth passes through to the population as prosperity.

The idea of the “Demographic Drag” is to extrapolate the demographic changes. Fertility drops and the population starts to shrink. The “baby bulge” ages and becomes dependent. The working age population is shrinking because less babies are being born. They must provide increasing amounts of social care. Economic growth slows.

A recent economic working paper tried to compute the impact of the drag. They modelled the economic growth of 145 countries from 1950 to 2015. They looked at the shares of the population at different ages. In particularly at the share of the working age population. They looked backwards from 2015. Their model explained significant amounts of the economic growth. Their analysis showed a 1% increase in the share of the population of working age increased income per head by 1%. There are multiple other determinants of economic growth. Their purpose was not to create the best estimate. Instead it was to create a model with which to simulate alternative futures.

Extrapolating forward shows the alternative impacts of demographics on future growth. They first fixed the age mix within their model at the levels of 2015. They could then predict growth “without ageing”. This showed an OECD growth rate of 2.5% between 2030 and 2050. They used the latest demographic predictions to recompute the growth. It showed a drag in 70 counties worldwide. These were the ones ageing fastest. With this the overall growth across the 145 countries dropped by a third or 0.8%. Whatever governments say about generating economic growth they will be fighting a headwind.

The Impact of Working Longer

Healthy ageing means that individuals can and wish to work longer. The statutory retirement age becomes irrelevant. This would clearly mitigate the drag. To model this they adopted an idea that had already been floated in UK government working papers. The idea is to set retirement age relative to life expectancy. The UK proposal was to have a fixed “retirement” of 15 years. Today’s UK life expectancy is 81. Pension age would thus be set at 66. As life expectancy increases so retirement age moves. Such a model is consistent with many of the messages in these Newsletters. We know that in many countries significant number of people are working until 70 or 75. To test this idea they related the revised "retirement ages" to known measures of healthy age. They looked across countries at “frailty”, cognitive ability and even “grip strength”. Such a simple metric was a good fit.

Clearly the impact of this approach grows as the population ages. They extrapolated their growth forecasts using this new rule. Such an approach did not stop ageing from reducing economic decline. It did cut cut the impact by a half.

Creating a new “model of life” to cope with a higher life expectancy is an individual need. It will evolve. One of the forces driving it will be macro-economics.