Economic and Policy Impacts of Demographics
Demographics have been on the list of most economic discussions for a very long time. The problem of population is not a new one, especially with economic scholars. Since economic deals with human interaction with natural resources, it's vital to understand the population's role across the global market. And it would not be possible to get any significant figures without demographic data. Apart from this, demography plays a vital role in economic development and policymaking. Which brings us to another topic under "The Problem of Population." We will be looking at the impact of demographics on the economy and policy.
Demographics in Economics
Demographics is a word derived from the ancient Greek term 'demo,' which means people, and 'graphics,' which stands for measurement. Therefore, we can simply say demographics counting of people. The study of demography has come a long way in economies. One very famous economics, Malthus, has looked at population growth widely as a crucial topic in economics. And in recent times, more studies have been carried out based on this subject. As the global economy has moved from the financial crisis that led to the Great Recession into sustainable growth, most studies are focusing on the cyclical aspects of the economy more than the structural aspects. The Great Recession was, without a doubt, one of the biggest shakes one the global economy. And it all started with decisions that were made in the financial sector, which did not come bring about very desirable results. But now, things have gotten better, as policy begins to normalize. Despite the perceived recovery, some cannot help but wonder what it means by 'normal.' It is hard to understand normal without considering the present situation and what can be considered abnormal. This question can be answered by looking at the general economy's foundational aspects and how they are evolving. Demographics is one of these factors that form the main pillars of development.
Demographics influence any economy's growth rate from various angles, which extends into structural productivity growth, living standards, saving rates, consumption, and investment, among other factors. As if that is not enough, demographics' influence can also be seen within the long-run rate of unemployment, equilibrium, housing trends, and demand in the financial markets. The economic theory looks at household interaction with the goods market as the main fuel behind economic development. In other words, it will be very hard to talk about economic growth without considering how different people make choices. One person alone cannot make a decision that influences the economy, but if they are made collectively, it can create a huge imbalance in markets. What is more, the variations in demographic trends across the globe can, without a doubt, influence current balances in accounts, as well as exchange rates. As you may already, it is factors like these that determine real economic growth. And therefore, understanding the global economy helps us to know what is happening with the changing demographics and their impact on monetary and fiscal policy.
The impact of demographic trends on the economy, considering the financial markets, and policy as immense. When the Great Recession hit the globe, many households lost their income sources, which changed their consumption behaviors. Where many were buying goods and using the money on various functions, it now becomes more of a saving. There was a need for the governments to come with different fiscal and monetary policies, not only for the affected people but also to boost the facing closure markets. Data like the rate of unemployment, as well as demographics of those affected, become a vital part of finding the right solutions. Many experts have used such data to understand how economic shakes affect households' consumption and how different people handle it.
Trends in global demographics
The mortality rate was higher than fertility for many generations until the 18th century, which made the world population grow very slowly. When technology set in and knowledge increased, the rate of advances in medicine, public health, and nutrition set in a new era of human existence. Because of these discoveries, those who fall sick are cured, and people live longer than they would have if there were not medical advancements. However, it is also amusing the rate of fertility also began to decline. Consider in the USA, for instance, the high costs of raising and educating children forced many people into having fewer children. While that was happening, the population kept rising. Besides, the migration of people from rural to urban centers increased the population in cities while reducing the number of people working on farms. Birth control's use and availability became a new norm that brought about a change in the social norm. The downward birth rate has been recorded in the U.S. after the Second World War when baby boomers become giving birth to their own children. According to the United Nations report, the U.S. witnesses in a fertility rate of 1.88 births per woman. The standard estimate for the U.N. is at 2.1, which puts the U.S. on the lower end. The fertility rate in 1900 was at 3, but now it has fallen significantly low.
These are the same figures that have been witnessed in other parts of the developed world like the U.K., Australia, and France. In some regions, the fertility rate is so low that the fear of losing a generation is present. These demographic trends have been a key player in the generation. As the case of the U.S., life expectancy has risen significantly as the population ages out. People are now expected to live to nearly 80 years old, which is 30% of the same data in 1900. This only means that people are now living longer because control has been put on the economy. But it's most importantly because of the economic advancement. At medium, an average person in many parts of the world can live up to 70 years, which is 10 years older than anyone would in the 1970s. However, according to the U.N. projections, these figures are changing, with data showing that the medium age will be about 42 years old in the USA. It has also been projected that the number of individuals age 65 and above per 100 working-age persons, 15 to 64 years, will be two times more than what was seen in 1970.
Currently, the world is witnessing a relatively stable fertility rate, with more aging in the population. And therefore, the chances of the world population slowing down are very high. Some experts predict that the number of births will significantly reduce every year for the next few years, perhaps until it starts rising again. In the U.S., population growth, including immigrants, will have slowed by close to 0.8% by 2050, from the current 0.5. It is the net migration that is making the U.S. economy swell even further. These same figures have been witnessed in many other world advanced economies, many of which are moving further along this demographic transition line. The process of population aging is also on an upward trend across the globe, as Bloom and Canning, 2004, report. For instance, Japan's population has been on a shrinking spree over the past half a decade. The ratio of older people to working-age is now the highest in the world.
Low- and medium-income countries, on the other hand, are already in the earlier stages of demographic transition. The population is younger and rapidly growing, with a rising labor force participation. Consider India, for instance, where the medium age is 27 years, and the population has been growing by 1.2% since 2010. This trend is expected to continue on the same route until 2050. The fertility rate in Africa continues on an upward projection, and hence, it's estimated that the rate of population growth will continue on the same upward trend up to 2050.
It is more than clear the trend in the demographic patterns have a huge impact on the economy. In the U.S., for instance, policymakers are going through a hard time trying to make policies that help in the growth of their economies. However, the effects are felt most based on the policy responses. Demographic studies have been on the rise over the years, as this is one of the main areas of interest where economic growth is concerned. Policy and economic growth have a direct relation to each other and to the development of demographic parameters. And even though the challenges are immense, it's always upon the modern economist to find a way out of any issues that affect economic growth, which is why we have to study demographics in economics.
Demographics and the labor market
In the labor market, households provide supply as firms and markets offer the demand. There is, therefore, a need for coexistence between people and the firms they work for. As you may have guessed, demographics have a huge impact on the supply of labor. If the mortality rates are low, people will generally live longer, increasing the labor supply. On the other hand, if the mortality rate is high, people will not live longer, which increases demand in the labor market. In the U.S., for instance, such a trend has been recorded during the late 60s and the l70s, when women and baby boomers began holding active roles in the labor market. As a result, an increase in the supply of prime-age workers, both women, and males, was witnessed.
And an increase in life expectancy also means individuals will hold onto work positions for longer as they save money for retirement. However, in population, aging eventually brings about a downward trend in labor force active participation in the aggregate. This effect is already clear in many parts of the world, especially in the USA. Participation in the labor force was 67.3% in 2000, which was its peak, and came down to 66.0% in the last month of 2007. This decline shows a cyclical factor, though studies have shown that most of the drop in general participation has something to do with demographics. People tend to participate less as they grow older. As such, low population growth and labor for participation lead to a reduced labor force. We have seen many countries seeking labor force from other markets outside their countries.
Demographics and Policy
Monetary policy does not necessarily affect the growth rate of potential output or long-term natural unemployment rate. Therefore, it has to involve this factor as a part of the economic environment while considering the pressure exerted by demographics on relative and previous levels. Besides, any change in demographics can have a huge effect on the transmission mechanism of this policy. In this case, we are looking at wealth effects versus income effects. It's always that older people own more assets than young people. They are also creditors, even as they draw down assets to fund their personal needs after retirement. Younger people are seen more as a borrower, and face a tighter credit constraint than aged people, especially since they tend to hold fewer assets. Demographics have more effects on the equilibrium of long-term interest too. Also, demographics may alter the decline in this rest until there a lower long-term growth in consumption.
Fiscal and other government rules are not left behind. Consider the rising share of older people in the U.S., which adds more pressure on programs like Social Security and Medicare. Other economies have government pensions and healthcare programs that are also affected in the same manner. Funding through increased government borrowing is another funding shortfall. Many economies have witness raised taxes, and reduced benefits, among other expenditures, which may not be good for anyone. In short, making an implementation, any policy has to consider some demographic parameters.
When it comes to any nation's economic development, issues like fiscal and monetary policies always come up. And since it's people who make these policies for people, demographic data is a crucial aspect. It is one of the leading forces behind economic growth. As stated above, a place with more people has more labor to offer than those with fewer people.
Author: James Hamilton