Implications of Population Aging for Economic Growth

07/01/2011
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If their population age structure between 1960 and 2005 had been what projections suggest it will be for the 2005 to 2050 period, the OECD countries would have grown by 2.1 percent per year rather than by 2.8 percent per year.

The share of the population aged 60 and over is projected to increase in nearly every country in the world between today and 2050. An aging population tends to lower labor-force participation and savings rates, and may slow economic growth. In Implications of Population Aging for Economic Growth (NBER Working Paper No. 16705), co-authors David Bloom, David Canning, and Gunther Fink conclude that OECD countries are likely to experience lower rates of economic growth because of population aging. In most non-OECD countries, however, declining fertility rates will cause labor-force-to-population ratios to rise: the shrinking share of young people will more than offset the aging of the population.

These researchers first study how changes in population age structure affected economic growth between 1960 and 2005. They then estimate how various countries' economies would have grown during those years if their labor force participation rates by age and sex had remained the same, but the age structure of their populations had been what we expect to prevail between 2005 and 2050. They conclude that labor force participation rates would have fallen in 126 of the countries included in the United Nations' World Population Prospects, with sizeable declines in China, Singapore, and some Western European countries.

These declines would translate into moderately slower economic growth. On average, the OECD countries would have grown by 2.1 percent per year rather than by 2.8 percent per year, while most of the developing countries would have grown 0.7 percent faster than they did. These growth figures likely over-estimate the true effects of aging, though. For example, increases in life-expectancy in the United States have been associated with a healthier life span. Thus, it is possible that Americans will respond by working longer, or by saving more during their working life. The authors also explain that behavioral responses to an aging population, such as greater female labor force participation, and policy responses like increasing the legal age of retirement and investing more in the health of those over 60, are likely to mitigate the effects of population aging.

--Linda Gorman