The ageing of the population brings with it a decline in the working age population. This is usually defined as the people between 15 and 64 (more later). We have discussed in this Newsletter some Government responses.
Automation provides one replacement for the workforce. Manufacturing has led the way. "Robots” on the production line are now common all over the world. There is a growing interest in the use of “robots” in all kinds of services. These range from automated bartenders to social companions for the elderly. The rate of population decline means compensating with automation driven productivity alone is going to be very difficult.
The next alternative is to raise the participation level. This is the percentage of the working age population that are employed. This is not about unemployment but about the structure of the workforce. There are differences between men and women in terms of the percentage who work. There are huge differences between countries especially for women.
In most countries being employed tails off as retirement age approaches. Often this is not voluntary. The US Schwartz Centre for Economic Policy has shown that 1m Americans aged between 55 and 74 have left the job market since March 2020. About 400,000 of them lost their jobs and have yet to find a new one. Some older people decided after COVID not to return to work. Others want to, but have been unable to find a job. The number participating in the workforce is never 100%.
At the same time Governments are looking to raise the effective retirement age. This is the age at which people actually stop work. Definitions of “working age” usually use the statutory pensionable age instead. Doing the latter half of the twentieth century the effective retirement age had drifted down and in many parts of the world was often less than the official retirement age. Since the turn of this century it has drifted upwards. It is now above the state pensionable age in many countries.
Migration is the fourth alternative. It is unlikely to provide a solution. The political and social barriers are high. As we saw in previous Newsletters migrants often want to return home. The availability of migrants is less than is commonly thought.
The last alternative is the topic of this Newsletter. If the migrants won’t or can’t come to us then we must take the work to them. In 2004 the share of the world manufacturing output produced by China was 8.7%. By 2017 that had reached 26.6%.
The Rise of China
In the last thirty years, China has emerged as a manufacturing powerhouse. It was integrated into the global goods trading system. This has provided a “sweet spot” in the global economy. China alone more than doubled the global available labour supply. This was focused on tradeable goods that could be shipped around the world.
They increased the working age population of the world by 240m people. By comparison the US working age population increased by only 60m in those 30 years. Those Chinese workers migrated to the cities and became part of the global supply chain. The growing globalization of the world economy enabled the transition. The confluence of Chinese urbanization and growing population and globalization was unstoppable.
Inflation and Wage Rates
The result has been the longest run of low inflation in the advanced economies. The supply of manufacturing labour overseas reduced the bargaining power of domestic labour. Labour unions became less powerful. The beneficiaries were the consumers. The losers have been those lower skilled manufacturing workers. They were the ones who were forced to compete with China.
On a country level the last thirty years has seen a reduction in inequality. The ratio of wage rates in the USA compared to China was 34.6 in 2000. There was a huge gap and funded the creation of the Chinese manufacturing complex. Foreign companies exported capital and knowhow. By 2010 the ratio had dropped to 9.7 and by 2018 it was down to 5.1. The old Eastern block countries have also been able to join this supply chain with benefits to them. The ratio of French to Polish wages was 3.9 it is now down to 2.9. Unfortunately within a country the impact has been to increase inequality. "Blue collar” workers were left behind.
The “Sweet Spot” turns Sour
The basic demographics means that the whole “machine” is now going into reverse. It will not just stop but will run backwards. The working age population of China is already declining. The migration to the cities is coming to an end since the urbanization rate is flattening out. The enthusiasm for globalization is also reversing. “On-shoring” is the new buzz word.
The macroeconomic implications are not all negative. Inequality within countries will fade as the negotiating power of domestic labour increases. Wage rates in those sectors of the work force will rise. The implication of course is that the low levels of inflation we have seen for so long are over.
Manufacturing can be returned but the demographics cannot be reversed. There is no growing workforce to tap in to. The very countries that have led economic growth for the last thirty years are now the ones that are leading the way in the ageing of their populations. With ageing comes increased social care and medical costs. Longer lives can still be healthy lives but there is a social and government cost. Dementia care costs are high and growing as the number of older people grows.
Dependency ratios have been at there lowest ever levels. The number of children declined and the ageing of the population lagged. Together they created a funding “holiday” with reduced number of dependents. That is now over and Governments all over the world are looking at new funding models. Increasing state pension age helps. This redefines "working age". Politically “the old” are a big and growing voting block. How far Governments can push retirement age remains to be seen.
Based on the arguments in “The Great Demographic Reversal”. Charles Goodhart and Manoj Pradhan