Monday, August 25, 2008

The social and economic pain of demographic change

Bob Q and I are continuing our Kondratiev conversation with Bob posting a comment on Sunday Essay - Kondratiev cycles, economic change and the ICT revolution. I will respond with a comment there, but I also thought that I would pick up one issue here, the potential social and economic pain associated with demographic change.

I am going to bare bones this post, stripping out detail as well as supporting evidence. Later I will add links to some of my posts on this issue at the end of the post so that those who are interested can check.

The world's population continues to increase. However, that increase is due to historical factors and conceals major changes to demographic structures that will force significant structural change. This change has aggregate and distributional elements.

Let's start with Australia.

At aggregate level, the first effect of the fall in the birthrate from the 1960s on was an expansion in the workforce as a proportion of the total population. This was aided by social shifts that saw many more women enter the workforce, so there was a double impact.

This created what we can think of as a demographic dividend. The cost of educating the young, for example, was now spread across a relatively larger workforce. This allowed us to spend more per pupil. Something similar happened in health, as another example, because spend here tends to be greatest on the young and old.

This demographic dividend has now gone into reverse with the aging of the population. To compensate for the relative decline in the workforce, we are going to have to achieve significant productivity gains just to stand still.

At distributional level, we are dealing with complex demographic patterns across Australia.

A few years ago I did some analysis on the NSW (New England) Mid North Coast, a major retirement area, that on the raw numbers suggested a precipitate population decline before the middle of this century. Moving inland across New England, we can already see this type of process working itself through.

These demographic changes will bring other changes that we can barely perceive. Just at present because of social as well as demographic change, the number of households has been growing. As part of this, the traditional family has declined as a proportion of households.

We are building and will continue to build lots of one and two bedroom flats to meet immediate needs. My problem is that I do not know who is going to live in them in the longer term. My best guess is that the structure of Australian households will move back to something approaching a more traditional level from 2030, leaving a growing unused housing stock.

Australia's problems are relatively mild by global standards. Japan and most European countries have already entered actual population decline. This will accelerate. In turn, this will lead to major changes.

These changes will benefit some, not others. More of us will be able to afford cheaper villas in Tuscany, although the locals may be less pleased.

No Government will willingly accept long term national decline. We have already seen pressure to increase the birthrate, to attract new migrants.

The first will have some affect, the second less so. There is now just too much global competition for migrants of the desired type.

The pattern of population aging varies greatly between countries.

The decline in the Chinese birthrate means that while the overall population is growing, the workforce is growing at a slower rate. The Chinese demographic dividend is going into reverse.

India's population is growing faster than China to the point that India will overtake China as the world's most populous nation. India's birthrate, too, is dropping, so that the country will experience the same problems a little later.

High population growth still exists in some parts of the world, Africa is an example, but here we come to another problem.

All other things being equal, the type of problems that I am talking about could be accommodated by shifts in economic activity and people over time, in so doing raising living standards.

Note to readers

I have run out of time in writing these musings. I will continue later.


Bob Q said...


You may be interested to know that these things come in cycles! :)

In the late 1800s, the Victorian Government was so worried about declining population levels that it explored all manner of measures to stimulate the birthrate (at least partly for fear of the yellow peril).

My mother explored this in her masters thesis "No Rising Generation".

Turning to today, there is no simple answer.

Developed countries compete for rich entrepreneurs as immigrants, but I'm thinking they don't really have it right.

What we need are young risk takers with the guts to go to a new country with no guarantees and the powerful motivation to build a far better life for themselves than they could abroad. A basic level of English would help and assistance with secondary education would be great, but IMHO that's about as far as it needs to go.

There will be social problems - I blush when I remember how we treated the Greek immigrants in my home town of Adelaide - but that's nothing new.

Also, I believe the greying of Australia is overstated. More and more are finding out theat they can't afford or don't actually want the retirement they dreamed about, and are actually returning to work, with useful skills (and generally at a lower wage than previously). Unfortunately, this is more based on reportage than rigorous study.

Finally, I'll be interested to see the results of the next census in terms of age. I think you'll find that the large expansion of immigration under Howard will have significantly skewed matters in a youthwards direction over the past 10 years.

Jim Belshaw said...

Hi Bob

I had not known of the Victorian example, so that's an interesting historical example!

I agree with you point re risktakers.

I do not think that the greying of Australia is overstated. That's a statistical fact. The response of us wrinklies is a different matter!