MSc International Management, Module 1: Demographic Change Report

This report examines the macroeconomic implications of demographic change, focusing on declining fertility rates, increasing longevity, and the aging of populations. It analyzes the impact on labor supply, considering the effects on potential GDP and the dependency ratio. The report delves into the effects on capital, including investment, saving behavior, and the Solow model's implications. Furthermore, it explores the impact on productivity, examining the role of innovation, technology, and the productivity of older workers. The report also discusses the implications for firms, including maintaining productivity, ensuring labor availability, and adapting to new market segments. It references various sources, including IMF reports and articles from the Financial Times, to support its analysis and provides insights into mitigating factors such as immigration, labor force participation, and technological advancements.

MSc in International Management
«Global Scenarios: Module 1 (Macroeconomics)»
Lecture 7
Demographic Change and Growth

G-20*: Population Distribution by Age
Groups (% of total population)
Source: IMF, “Macroeconomics of Aging and Policy Implications”, prepared by staff for the G20 2019
* https://ec.europa.eu/info/food-farming-fisheries/farming/international-cooperation/international-organisations/g20_en

Demographic Change: Main Drivers
progression of large-sized
cohorts to older ages
Declining fertility rates
Increasing longevity

Not only developed economies…
Robin Harding, “The costs of declining population”, Financial Times, Jan 14, 2020

MACROECONOMIC IMPLICATIONS:
LABOR INPUT

Macroeconomic Implications: Labor
• Recall our production function:
𝑌 = 𝐴𝐾
1
3𝐿
2
3
• Less workers available → lower output
• Implication: lower level of potential GDP

Macroeconomic implications: Labor
𝒀
𝑷𝒐𝒑
= 𝒀
𝑳× 𝑳
𝑷𝒐𝒑 (𝟏𝟓 − 𝟔𝟒)
× 𝑷𝒐𝒑 𝟏𝟓 − 𝟔𝟒
𝑷𝒐𝒑
– 𝐿
𝑃𝑜𝑝 15−64 = participation rate
– 𝑃𝑜𝑝(15−64)
𝑃𝑜𝑝 = 1 – dependency ratio
• “Accounting” effect - per capita GDP declines if:
– The dependency ratio increases
→ The share of working age population declines

Macroeconomic Implications - Labor
Average annual Contributions of the Change of the Share of the Working
Age Population to GDP per Capita Growth (IMF)
Source: IMF, “Macroeconomics of Aging and Policy Implications”, prepared by staff for the G20 2019

Impact of aging: a counterfactual analysis
Bloom D., D. Canning and G. Fink, “Implications of population ageing for economic growth”, Oxford Review of
Economic Policy, Vol. 26, n. 4, 2010, pp. 583-612
a thought experiment (Bloom et al., 2010)
• Consider the actual path of income per capita
between 1960 and 2005
• Assume a dynamics in population and labor
force/population ratio equal to the one expected
to undergo between 2005 and 2050
• rather than the actual change they underwent during
the period 1960-2005

Impact of aging on growth: counterfactual
analysis
Current OECD members only:
actual and counterfactual annual
growth rates of income per capita,
1960–2005
(counterfactual: 2005–50 growth
rate of labor force per capita)
Bloom D., D. Canning and G. Fink, “Implications of population ageing for economic growth”, Oxford Review of
Economic Policy, Vol. 26, n. 4, 2010, pp. 583-612
Growth: 2.1% instead of
2.8% (26 OECD average)

Macroeconomic Implications: Labor
However
the magnitude of the effects depends, among
other things, on how firms, governments and
households react…

Mitigating Factors
• Immigration
• Changes in labor force participation
– Women and older workers
– Work longer
• Improvements in health and education
– Increasing productivity
• Change in saving behavior (more on that later
on)
• Innovation and technology

MACROECONOMIC IMPLICATIONS:
CAPITAL

Macroeconomic Implications: Capital
Uncertain impact on capital
• Many factors may play a role affecting:
– Capital demand (investment)
– Capital supply (savings)

Macroeconomic Implications: Capital
• Lower labor ⇒ lower marginal return on capital
• Lower growth
• Lower demand for new houses and
infrastructure given an older population
→ Reduction in the demand for capital
(A shift in credit demand)

Macroeconomic Implications: Capital
• According to the Solow model, lower investment
leads to a lower steady state
𝑘𝑆𝑆
2
𝑠2𝑦𝑡
𝑦𝑡
𝑘𝑡
𝑘𝑆𝑆
1
𝑠1𝑦𝑡
𝑑𝑘𝑡

Macroeconomic Implications: Capital
• Impact on the saving rate and saving behavior
– Age composition of the workforce
– Reactions to demographic changes
• Saving behavior
• Later retirement
• Participation to the labor force
→ Impact on saving
(A shift in credit supply)

Capital: two contrasting views
secular stagnation
– A reduction in demand for capital (investment)
– An increase in supply of capital (saving)
• Saving for a longer life
• Impact of the pension system
– Persistently low real interest rate
• Monetary policy issues
• Change in assets →challenges to the stability of the
financial system

Capital: two contrasting views
Reduction in saving
– Aging and a higher share of old age population
more than compensate the effects on saving of
the increase in life expectancy with lower fertility
(Favero and Galasso, 2015)

MACROECONOMIC IMPLICATIONS:
PRODUCTIVITY

Macroeconomic Implications: TFP
• Romer model:
– knowledge grows at a constant rate
Δ𝐴
𝐴𝑡
= 𝒈𝑨 = 𝑧𝐿𝑎𝑡 = 𝑧𝑙𝐿
– The growth rate of knowledge depends on:
• The number of researchers (𝑙𝐿)
• Researchers’ productivity (𝑧)
• Less researchers → less innovation
– Not only a lower per-capita GDP level, but also a lower
growth rate

Macroeconomic Implications: TFP
• Are older workers less productive than younger
workers?
– Yes, if accumulation of experience does not make
up for
• the depreciation of knowledge
• loss in physical or mental capabilities
– Contrasting evidence!
• Firms may be incentivized to invest more in
labor substituting technologies
– Impact on productivity?

IMPLICATIONS FOR FIRMS

Implications for firms
The Boston Consulting Group, Global Aging. How companies can adapt to the new reality, Report, December 2011

Implications for firms
• Maintaining high productivity
– “Age friendly” workplace
– Can older workers be more productive than their
younger counterparts thanks to experience?
• Flexible schedules
• Ongoing training in new skills
• Wellness programs
• Re-allocation of physically demanding tasks
• Seniority-based pay vs performance-based compensation
Patrick McGee, “Germany invests to prolong employees’ working lives”, Financial Times, Jan 17, 2019

Implications for firms
• Ensuring sufficient labor availability
– Ability to attract workers
– Transmission of knowledge from retiring workers to
younger ones
• New technologies and innovation
– Increasing TFP is crucial to counteract the effects of
aging
– Skill-composition of the workforce

Implications for firms
• Presence in high-growth countries
• Search for more promising market segments
(e.g. the silver segment)
– New goods/services
– New features of existing goods/services

Materials for next week
VIDEO:
Erik Brynjolfsson, “The key to growth? Race with
the machines”, TED2013
READINGS:
Federica Cocco, “Rich nations urged to prepare
workers for age of automation”, Financial Times,
Jan 17, 2019
The Economist, “Does working from home make
employees more productive?”, Dec 27, 2020

Summary
• Population aging
– Decline in fertility rate
– Increase in life expectancy
• Different age groups
– different needs
– Different productive capacities

Summary
• Implications
– Labor shortages
– Productivity issues
– Savings and investment
– Challenges for firms