The drops are small, a few tenths of a percentage point each year off proportions of working-age people, which had peaked in developed countries at 61.4 percent in 2009. But Research Affiliates expects the working-age share of total population to fall steadily for several decades, slowing economies each year, until they bottom at about 50 percent in 2040 or so.
A country can compensate for this demographic drag on economic growth by encouraging people to work longer or to use technologies to increase output. But most economists doubt that such changes are forthcoming or would be enough.
"You need incredible productivity growth," says Michael Feroli, a JPMorgan economist. He says economic growth of 3 percent is unlikely on a "sustained basis" even for the United States, which is blessed with a flow of immigrants, albeit a slowing one, to soften the blow.
Robert Arnott, chairman of Research Affiliates, thinks investors and policymakers don't realize how much demographics will hurt economies now because they never appreciated how much they helped in the past. Payrolls rose as the oldest baby boomers started working in the mid-1960s — then kept rising as those born later took jobs. Retirees were relatively few because most workers were young. And many women joined the workforce for the first time.
It was an unusual confluence of beneficial demographic shifts, and perhaps unrepeatable.
"The developed world in the past 60 years has had the most benign demography in the history of man," Arnott says. But economic growth in developed countries will "tumble" to no more than a tepid 1.5 percent a year, on average, until 2040 or so, he estimates. And Arnott says economic growth per capita, a rough gauge of living standards, may "swing negative."
It's already on its way.
From 1960-2000, GDP per capita rose an average 2.6 percent a year in the big six developed countries. Since then, it has grown less than 1 percent a year. Arnott thinks the demographic drag is going to worsen, subtracting roughly a percentage point from the annual rate in the next few decades.
That suggests living standards barely growing, or even falling.
Andrew Cates, senior international economist for UBS in Singapore, worries that people accustomed to living better each year won't accept the new slow-growth future and will demand change through protests. "It's a recipe for social instability," he says.
Others note that smaller families are associated with some social benefits for societies. Births have plunged in countries where education has improved, the middle class has expanded and women have gained more freedom and rights.
Still, even optimists see the world at a delicate crossroads.
Reiner Klingholz, head of the Berlin Institute for Population and Development, says societies are unsure of their goals now that easy economic expansion is over. "We have no plans for how to run a society without growth," he says.
In aging societies, the big fear is that paying for benefits for the swelling number of retirees will weigh on economic growth. But even if benefits were fully funded, more retirees would practically guarantee slower growth for three reasons:
First, retirees don't produce anything. So a country's output falls unless new workers producing the same value of goods and services replace them.
Second, retirees don't save, invest and spend as much as workers with paychecks. That, in turn, cuts demand and slows growth.
A third reason is less obvious: Productivity of workers, or output per hour, tends to peak as they reach their mid-50s. And the increases in productivity as they near that age tend to be small. And with economic growth, only the change in productivity from year to year counts, not the level.
In other words, you may be very productive at work, but unless you're becoming even more so each year or work more hours, you're not helping the economy grow. And older workers past their peak productivity, by definition, subtract from growth.
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