Is aging population bad for economic growth?

By Chang Se-moon

The July 7, 2017 article in The Korea Times introduced a study by the Bank of Korea, which states that the annual rate of Korea's economic growth may plummet to 0.4 percent in 10 years "because of the rapidly aging population." The central bank is reported to have said that the rapidly aging population in Korea can pose "a huge threat to the country's economic growth."

There is no doubt that population is aging in most, if not all, countries, owing to increasing longevity, decreasing mortality rates, and decreasing birthrates. The negative view of the impact of an aging population on the economy prompted my curiosity to explore the subject a little deeper.

I googled "impact of aging population on economic growth" and selected the four studies that appeared in PDF on the first page of my Google search. One study was a discussion paper titled "The Effect of Population Aging on Economic Growth," which was written by Nicole Maestas, Kathleen Mullen and David, and was published by the Stanford Institute for Economic Policy Research in October 2014.

The Stanford study does support the Bank of Korea view by stating in its abstract that "a 10% increase in the fraction of the population ages 60+ decreases GDP per capita by 5.7%." This reduction in economic growth frompopulation aging, according to the authors, is "due to a decrease in growth in the supply of labor," and "a reduction in productivity growth."

The other three studies I reviewed had different, if not opposing, views.

The University of Porto (in Portugal) School of Economics and Management published a working paper in September 2013, titled "The Impact of an Ageing Population on Economic Growth: An Exploratory Review of the Main Mechanisms." The report was prepared by Renuga Nagarajan, Aurora A.C. Teixeira and Sandra Silva.

After an extensive review of published studies, the Portugal study finds on page 14 that the impact of aging on the economy varies with the focus of the studies. Studies that focused on public expenditure found a negative impact. Studies that focused on human capital did not find any significant relation between aging and economic growth. The impact was found positive, when studies focused on the consumption and saving patterns.

A 2008 study by Washington DC-based Commission on Growth and Development indicates a positive impact of aging population on economic growth. Working Paper No. 32 of the Commission titled "Population Aging and Economic Growth" was prepared by David E. Bloom, David Canning, and Günther Fink.

The Commission study suggests that the labor force to population ratio will actually increase with aging population in most countries. This is "because low fertility will cause lower youth dependency that is more than enough to offset the skewing of adults toward the older ages at which labor force participation is lower." Further, female labor force participation increases as the birthrate declines. The Commission study concludes that there is little evidence of a negative impact of an aging population on economic growth.

The Commission study stresses the importance of public policy in determining the effect of aging on economic growth. The study states that "the problem of population aging is more a problem of rigid and outmoded policies and institutions than a problem of demographic change per se." Policies suggested for consideration include a higher retirement age, flexible old-age pension arrangements, legal and cultural efforts to discourage age discrimination by employers, and lifelong education programs.

The latest, and perhaps the most conclusive study on the subject, is "Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation," which MIT professor Daron Acemoglu Pascual Restrepo presented during the January 2017 American Economic Association annual conference.

The negative view of an aging population on economic growth is rooted in Professor Alvin Hansen's famous 1938 presidential address to the AEA, suggesting likely "secular stagnation" because "an aging population creates an excess of savings relative to investments." Several recent studies also suggested "an older population will reduce labor force participation and productivity."

Professor Acemoglu, however, flatly states in the abstract that "there is no such negative relationship in the data. If anything, countries experiencing more rapid aging have grown more in recent decades." Professor Acemoglu suggests that "this counterintuitive finding might reflect the more rapid adoption of automation technologies in countries undergoing more pronounced demographic changes."

According to professor Acemoglu, the early 1990s or 2000s are viewed as the beginning of the adverse effects of aging in much of the advanced world, but no negative association was found between aging and lower GDP per capita. What explains?

"The post-1990 era coincides with the arrival of a range of labor-replacing technologies, most recently robotics and artificial intelligence, which provide a wide variety of options for firms to automate the production process." (p. 2)

Now seems to be about time for everyone to view the aging population with a more positive than negative view.

Chang Se-moon is the director of the Gulf Coast Center for Impact Studies. Write to him at: changsemoon@yahoo.com.