Economics is more than demographics, and remembering that makes for better economic and social policy.
The demographic dividend is the idea that it is good for the economy to have a lot of young people come of age around the same time as it creates a large cohort of new workers and consumers. The inverse is known as a demographic bust where a large cohort of workers exit the workforce around the same time which creates a large number of vacancies and a large number of pensioners which puts a strain on the welfare system and the broader economy. Taken together these two theories or popular narratives creates a sort of ‘demographics as destiny’ narrative for the economy. In the West the baby boomers is a large generation of people who are heading towards retirement which, when coupled with low fertility rates, means that the economic future will be tough. It is a beautifully simple story about the economy which almost invariably means that that it is wrong.
Economic growth comes from three sources: an increase in the number of hours worked, an increase in efficiency due to getting better equipment, and an increase in general productivity through technological progress. As long as increases in productivity keep pace with or exceed the loss in hours worked it is possible for an economy to remain at its current size while the number of workers increase, and of course conversely it is possible for an economy to stay stagnant in spite of a growing workforce if productivity is declining. But these forces interact in other ways too; for example a growing workforce puts downward pressure on wages which disincentivises productivity increasing capital investment and vice versa. Japan is famous for its very low fertility rate and its highly automated and highly productive economy, as one necessitates the other. The US has a steadily growing population and a much less automated economy than in parts of Europe with smaller populations.
The more interesting story about the interplay between demographics and the economy is that economic policy can have a much larger effect on fertility than family policy. Politicians across the rich world encourage the young to start families to stave off a demographic bust while the down payment on an apartment in a large city is a year’s wages before taxes. No one wants to have a family of three or four in a studio apartment. People don’t stop having children because they don’t want to, they stop because they can’t afford to provide the life they would want their children to have.
The idea of the demographic dividend is backwards. You get good demographics by having a strong economy where it is affordable to raise a family, you don’t get a strong economy from good demographics.
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I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson