Why an ageing population might be good news for the economy

by Nick Bunker, Policy Analyst, Washington Center for Equitable, Jan. 31, 2017

The world’s population is getting older. The share of the global population that is more than 50 years old is becoming larger and larger, presenting several economic challenges, the most troubling being the possibility of much slower economic growth. Several economists have raised the alarm that an older population will slow growth due to lower productivity, less labor force participation, and less investment growth. If this hypothesis is true, then the global economy could be in store for a sustainable period of weak growth. But are these fears about the future overblown?

In a new working paper, economists Daron Acemoglu of the Massachusetts Institute of Technology and Pascual Restrepo of Boston University look at the relationship between an aging population and aggregate economic growth. After running several regression analyses that account for initial GDP levels, they find that there isn’t a negative relationship between an older population and GDP growth. In fact, some of the results indicate a positive relationship between aging and economic growth, though this relationship is weaker when they look at only high-income countries of the Organisation for Economic Co-operation and Development.

Given the expectations that an aging population should stifle growth, what could explain this lack of a negative relationship? The answer that Acemoglu and Restrepo offer is technology. The economists hypothesize that as populations age businesses are more likely to adopt technology that helps boost productivity. They show preliminary results from upcoming work that shows a relationship between aging and the adoption of robots.

In other words, they believe there is an endogenous response to aging as the economy reacts to these demographic changes. They argue that as the population ages, the number of working-age people declines relative to demand, which in turn increases wages. Higher wages then give firms an incentive to invest in technologies that make labor more productive. This boost in productivity offsets the reduction in economic growth from an older population or might overwhelm it and increase overall economic growth.

The key factor here is that the two economists find that aging and the reduction in the supply of prime-age workers will necessarily lead to an increase in wages. Demographics may be very important for understanding economic trends, but they are not destiny. Higher wages might be an important and necessary trend for a boosting growth in a future where workers are increasingly older, but we should be skeptical that such a change will happen on its own. Policy might have to contribute as well.