A couple of recent papers from the IMF have detailed the palpable problem of aging populations and specifically aging workforces across Europe and Japan; highlighting the current and expected accelerating impact these will have on productivity and economic growth. Whereas an increase in the dependency ratio is an obvious drag to economic growth - the effects of an aging workforce itself is not obviously a hindrance to productivity. For an older workforce may make up for in experience what they may have lost in vigour and entrepreneurialism associated with youth; particularly in technologically advanced economies where the considered elderly may easily be just as effective in many fields of employment. Studies of this effect on advanced economies are scarce and ones accounting for the further potential advance of technology are fewer but these two papers, “The Impact of Demographics on Productivity and Inflation in Japan” and “The Impact of Workforce Aging on European Productivity” go some way to showing that these ‘headwinds can have a non-trivial impact on total factor productivity (TFP) and deflationary pressures.’
The age distribution of the workforce in Europe has shifted upwards over the past few decades but will accelerate in the years ahead to the extent that it ‘could reduce TFP growth by an average of 0.2 percentage points every year over the next two decades’. ‘But in countries where aging will be most pronounced—Greece, Hungary, Ireland, Italy, Portugal, Slovakia, Slovenia, and Spain—annual total factor productivity growth could be reduced by as much as 0.6 percentage points.’ Japan faces the same problem along with an overall declining population and few major economies are exempt from the predicament. Across the 24 European countries projected by 2030 all except Luxembourg will have between 15-25% of the workforce aged 55-64.
Countries that have already ridden the demographic growth boom and failed to invest those gains preparing for when these population pyramids become top heavy will face an increasingly uphill battle. Those with already unsustainable net foreign debts will have shrinking productivity with which to service these hefty debts whilst spending on increasing welfare costs. This problem is only exacerbated every time such necessary global deleveraging is pushed down the road and it will remain a long term risk to global growth and inflation prospects well beyond the next few election cycles and perhaps well into all of our retirements (or geriatric careers). We continue to believe that high quality investment grade debt from net foreign creditor regions represents a sensible investment in the face of such growth headwinds.