Economic effects of population ageing and decline

Is the world heading for an economic u-turn?
Higher wages, higher inflation and higher interest rates?

by Marcus Roberts

Further to my post at the end of last week, this blog from the London School of Economics Business Review contains some further interesting points and conjectures about the economic effects of population ageing and decline.

It starts by noting that the post-WWII baby boom followed by a declining birth rate and rise in life expectancy lead to a sharp increase in the world's working population (both absolutely and as a ratio to the number of non-working dependents). These demographic forces lead to the following trends:

1. the off-shoring of manufacturing production
2. the stagnation and sometimes decline of the real wages of median workers as labour became more plentiful
3. a collapse in the membership and power of trade unions
4. an increase in inequality within countries
5. a decrease in inequality between countries
6. deflationary pressures (apart from commodities)
7. decreases in nominal and real interest rates.

But now these underlying demographic trends are slowing down and reversing. The ratio of dependents to workers is going to rise in most of the globe. So many of these economic trends we have become used to will also change. The blog (which is drawn largely from a paper presented to the June 2016 BIS Conference by Manoj Pradhan and Charles Goodhart) claims that the years to come could see an increase in national production to the detriment of free trade, rising real wages and greater labour power, less inequality in countries and more inflation and higher interest rates.

The drop in the number of workers will lead to greater unit labour costs and taxation will “rise sharply” to pay for the old's pensions and medical expenses.

The authors doubt that there is the political will to greatly rise the retirement age and cut back medical schemes for the elderly, and that robotics will not be able to make up for the large fall in the working population. While India and Africa could eventually take the place that China and East Asia held during the late twentieth century as the source of ever more cheap labour, the infrastructure and governance for this to happen is not yet in place.

....................

Read more: www.mercatornet.com