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Demographic Dividend of Ageing Global Populations

Whilst it can be acknowledged there is certainly a rise in the ageing populations around the world there are still many unemployed youth who cannot secure employment because they are the product of poor education being taught to them in their Schooling years.

Fixing education standards and the delivery of education will go a long to also fixing the skills shortages issues and Education without Borders”(r) is a must to enable a more mobile workforce.

One must also take into account the daily advancements of digital disruption and that in itself will ensure the actual number of skilled workers required to undertake the various roles will be considerable reduced, as if proven by actions in China when it introduced robots into it factories.

In reading the article below one must consider there are solutions as per above that will go a long way to solving any future skills shortages;

 

GREG IPTHE WALL STREET JOURNAL DECEMBER 9, 2015 12:00AM

China became the world’s factory thanks to a seemingly limitless number of rural workers, but that excess supply is shrinking and wages are climbing.

Ever since the global financial crisis, economists have groped for reasons to explain why growth has disappointed, citing everything from fiscal austerity to the euro meltdown. They are now coming to realise that one of the stiffest headwinds is also one of the hardest to overcome: demographics.

Next year, the world’s advanced economies will reach a critical milestone. For the first time since 1950, their combined working-age population will decline, according to UN projections, and by 2050 it will shrink 5 per cent. The ranks of workers also will fall in key emerging markets, such as China and Russia. At the same time the share of these countries’ population over 65 will skyrocket.

Previous generations fretted about the world having too many people. Today’s problem is too few.

This reflects two long-established trends: lengthening life spans and declining fertility. Yet many of the economic conse­quences are only now apparent. Simply put, companies are running out of workers, customers or both. In either case, economic growth suffers. As a population ages, what people buy also changes, shifting more demand towards services such as healthcare and away from durable goods such as cars.

Demographics help explain why a historically weak recovery in the US, for example, has nonetheless seen the unemployment rate drop by half. The economy doesn’t need as many new jobs to employ the smaller net flow of entrants into the workforce. Home builders are simultaneously suffering from shrinking demand since the home-ownership rate is declining, and from labour shortages as the baby boomers retire.

Mounting pensions are an important reason peripheral European countries such as Greece have such intractable debt burdens and why Germany is so reluctant to stimulate its own economy despite a balanced budget.

Meanwhile, the movement of so many people into the highest saving period of their lives has produced excess savings that have held down interest rates and inflation, making it difficult for central bankers to use their traditional tools to revive economic growth.

Demographic forces are assumed to be slow-moving and predictable. By historical standards, though, these aren’t, says Amlan Roy, a demographics expert at Credit Suisse. They are “dramatic and unprecedented”, he says, noting it took 80 years for the US median age to rise seven years, to 30, by 1980, and just 34 more to climb another eight, to 38; Australia’s median age similarly moved from 29.4 in 1980 to 37.5 today.

There is no simple answer for how business and government should cope, since each country is ageing at different rates, for different reasons and with different degrees of preparedness.

Automation can boost workers’ productivity and support the burgeoning ranks of the elderly. Assumptions about ageing also need to change. The typical 65-year-old today is roughly as healthy as a 58-year-old was four decades ago and can thus work longer. Older, richer countries can boost their immigrant intake from low-income economies, primarily in Africa and Asia, which will make up a growing share of the world’s working-age population — if they can overcome political opposition.

Population questions have long preoccupied economists. In 1798 Thomas Malthus, a British essayist, argued that humanity would reproduce faster than food production could rise, leading to destitution and starvation. He was wrong. The Western world’s population grew rapidly across the 19th and 20th centuries, with a dip in 1918-19 because of World War I and the Spanish flu pandemic. But rising agricultural productivity proved more than capable of feeding the extra mouths.

When US population growth slowed in the 1930s, Alvin Hansen, a Harvard University economist and an influential disciple of John Maynard Keynes, said this caused businesses to invest less because they had fewer workers to equip and because elderly consumption patterns favoured personal ser­vices over capital-intensive homes and durable goods.

In a landmark 1938 speech, Hansen said this had mired the US economy in “secular stagnation”, producing “sick recoveries which die in their infancy and depressions which feed on themselves and leave a hard and seemingly immovable core of unemployment”. He advocated expanded government spending to restore full employment.

Hansen spoke too soon. The population slowdown of the 30s was a temporary after-effect of the 1918 pandemic and a clampdown on immigration in 1924. World War II led to an explosion in government spending that restored full employment, and the baby boom after the war’s end put to rest fears of declining population.

Indeed, population around the world took off as advances in healthcare and nutrition caused child mortality to plummet and life expectancy to soar.

Fear of overpopulation became widespread, epitomised by Paul Ehrlich’s The Population Bomb in 1968 and the Club of Rome’s Limits to Growth in 1972.

But right about then, fertility rates began to drop in both advanced and underdeveloped countries. With a lag, some of Hansen’s predictions began to come true, most prominently in Japan. In 1996, its working-age population began to shrink, and a few years ago so did its total population.

Japan is an extreme case, but the rest of the advanced world and many emerging economies are following similar paths. By 2050, the world’s population will have grown 32 per cent, but the working-age population (15 to 64 years old) will expand just 26 per cent.

Among advanced countries, the working-age population will shrink 26 per cent in South Korea, 28 per cent in Japan, and 23 per cent in Germany and Italy. For middle-income countries it will rise 23 per cent, led by India at 33 per cent. But Brazil’s working-age population will edge up just 3 per cent, while Russia’s and China’s will contract 21 per cent.

Among rich countries, the US remains demographically fortunate: its working-age population should grow 10 per cent by 2050. But it still will shrink as a share of total population, from 66 per cent to 60 per cent. The demographic drag on growth, in other words, will last decades.

Less labour, less growth

A country’s long-term potential growth rate depends on two things: the number of workers and how productive they are. Slower population growth directly chips away at the number of workers.

In 2008, the same year Lehman Brothers failed, the first American baby boomers qualified for the pension, and since then the number of beneficiaries has ballooned, from 41.4 million to 49 million.

This is an important reason the US labour force has grown only 0.2 per cent a year since 2008, compared with 1.2 per cent in the previous decade, and the labour-force participation rate — the share of adults over 15 working or looking for work — has slumped to 62.4 per cent, the lowest in nearly 40 years, when women were far less likely to be employed outside the home.

This originally seemed the result of the long-term jobless giving up the hunt for work and dropping out of the labour force. But in 2006 a team of economists at the Federal Reserve predicted this would happen because of long-range structural factors: the ageing baby boomers would start retiring; the number of working women would level off; young adults would stay in school longer; and some unskilled workers would bow out.

Those economists now predict the participation rate will fall further to 61 per cent by 2022. That is the main reason officials think the US potential growth rate has dropped to 2 per cent from 3 per cent in the decades before the crisis. Some economists are even gloomier.

Savings, interest rates

People’s saving habits change as they age. In their 20s and 30s they borrow and spend for children and home as they are starting their careers. In their 40s and 50s, those obligations recede and their incomes rise, so they save more. Once they retire, they live off their savings and government support.

When Carla Ponce and her husband got married in 1987, they didn’t save anything at first. They bought a house in Las Vegas with no down payment. “With two kids, my husband between jobs, we could barely pay the mortgage,” she recalls. They moved to Kenosha, Wisconsin, ploughed the profit from their Vegas home into a new home, and Ponce began steadfastly socking away 10 per cent of everything she earned. Now 56, she continues to save so that in four years she can join her husband in retirement, buying a boat as a rare indulgence.

This pattern, multiplied across many countries, has a powerful economic impact. How much a country saves is heavily influenced by the difference between the share of its population aged 40 to 65 and the share over 65.

Because capital markets are global, excess savings in one country spill over to another via interest rates. Gavin argues the rising number of mature workers relative to elderly retirees is a key reason inflation-adjusted interest rates have steadily declined in recent decades, and are now negative in most advanced countries. Those demographic influences are about to reverse.

This coincides with another demographic factor: consumption habits change as people age. Younger households spend more on homes, cars and their children’s education. For the typical American between 35 and 44, 8 per cent of total consumption goes towards mortgage interest, compared with just 3.6 per cent for someone over 65. By contrast, the typical over-65 devotes 13 per cent of total spending to healthcare, compared with 6 per cent for a 35 to 44-year-old. Lowering interest rates works by encouraging consumers to “pull forward” purchases they otherwise may have waited to make. But the elderly have less future consumption to pull forward.

These demographic shifts will have a profound effect on individual companies, anointing new winners and losers. For some, it means being squeezed between the retirements of current workers and the shortage of young apprentices. For others, it means coping with a shrinking customer base.

Michael Green, who manages a hedge fund that seeks to profit from demographic trends, says Abercrombie & Fitch’s sales and stock price aren’t languishing because of disenchantment with “ripped jeans or skinny models” but because its target demographic of teenagers is shrinking.

Other companies in similar straits are Lululemon Athletica, whose key demographic is women aged 35 to 50, and Budweiser and Harley-Davidson, whose core customers are white, baby-boomer men. By contrast, pharmaceutical firms will reap a windfall; the average American goes from 3.3 prescriptions in his 50s to 4.4 after 65.

Fixing the problem

Population trends across the next 35 years are challenging but aren’t set in stone. Government policies and changing social attitudes can raise fertility. In October, China scrapped its one-child policy. Still, evidence from places such as Singapore, Australia and the Canadian province of Quebec that have offered cash grants to encourage bigger families and more generous child support for working mothers shows how difficult it is to boost fertility rates; they remain well below the replacement rate of 2.1. Even with higher fertility, it would be decades before trends changed meaningfully.

As Jens Weidmann, president of Germany’s Bundesbank, says, “Because Germany’s birthrate has been falling for decades, those who would now perhaps be thinking about having children were never actually born.”

Companies running short of workers can turn to automation to adjust. China became the world’s factory floor thanks to a seemingly limitless supply of rural workers. But with the excess supply now shrinking, Chinese wages are climbing sharply and many Chinese exporters are turning to robots to lift productivity.

Another route is to boost immigration. This faces several problems, though. The biggest suppliers of immigrants to the US, such as Mexico and China, are themselves ageing, and the cohort that traditionally sought a better life abroad is shrinking. Mexico’s fertility rate has dropped from 5.4 in the late 1970s to 2.3 now; by 2030 it will be 1.9, the same as the US — and below replacement rate.

The countries with high fertility are mostly in Africa and Asia. In 2050 India will be the world’s most populous country, Nigeria will be third and Indonesia fifth. Most, though, will still be poor. Indeed, low-income countries will make up 14 per cent of the world’s population in 2050, compared with 9 per cent now. These are, therefore, the countries that are likeliest to provide immigrants.

In many rich countries, worker-hungry businesses are eager for more immigrants. But to stabilise the elderly share of advanced countries’ population would require an immediate eightfold increase in immigration from less-developed countries, according to the International Monetary Fund. This isn’t politically feasible, given the resistance even current levels of migration have generated.

Probably the most promising way to cope with an ageing population is to encourage today’s workers to work longer. This has been proved in Japan, where 22 per cent of those over 65 work, compared with 18 per cent in the US and 12.9 per cent in Australia. That suggests there is plenty of potential for workers to retire later.

Business will have to adapt to an older workforce. In 2007 German carmaker BMW redesigned a gearbox production line to fit the older profile of workers it expected in 2017. Among the changes: wooden floors and special shoes to ease joint strain; flexible magnifying glasses for working with small parts; and larger typefaces on computer screens. The changes brought the productivity of older workers up to that of younger workers at minimal cost and have since been applied across the company.

Indeed, several studies have found older workers are as productive as their younger colleagues, and often more productive. As the Bundesbank’s Weidmann notes, “The young can run faster but the old know the shortcuts.”

The Wall Street Journal


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