In our previous chapter we learned how the age structure of a population changes
In our previous chapter we learned how the age structure of a population changes during the demographic transition. Here we will examine the impacts of those changes on the economy.
Age Structure is not everything
Though the age structure can influence the economy, a country’s economy is influenced even more by its past history, its capital stock, and its current governance than by its current demographics. For example, let’s compare Bangladesh and Japan. In 2020, according to the World Bank[1], Japan had a population which was 25% smaller than Bangladesh’s. Japan also had a lower fraction of its population between the ages of 15 and 64 (58% versus 68% in Bangladesh). Its Aged Dependency Ratio was .51 compared to .08 for Bangladesh. Yet somehow Japan’s workforce was measured to be roughly the same size as Bangladesh’s, 69 million for Bangladesh vs. 71 million for Japan.
Despite having two million fewer people working, and despite those workers being older on average, Japan had a GDP which was more than thirteen times higher than that of Bangladesh, or more than five times higher when adjusting for the difference in the cost of living between the two countries.
Though age structure is not the most important consideration when explaining national income or national income per person, in this chapter we take a look at what role it may play.
Age Structure and GDP per person
Let’s use Y to represent output like gross domestic product (GDP), or GNP, NDP, NNP, Green GDP, Green GNP, etc. This model is going to be real, measured in stuff, not dollars. It won’t show prices or inflation.
N represents population size. So Y/N is output per person.
Output per person, Y/N, can be broken down into three components like this:
Equation 16-1. Y/N = Y/H * H/L * L/N
In other words,
output per person = output per worker hour * hours per worker * fraction of the population which works
There are then three ways to improve output per person: by increasing output per worker hour (known as labour productivity), by increasing the number of hours worked per worker, and by increasing the fraction of the population which is working.
Please note the following important point:
Output per person has nothing to do with the absolute size of the labour force.
Fiscal Dependency
What about the amount of money that governments spend on health care and other supports for older adults? Might that reduce GDP?
Spending does not necessarily affect income. Just because you are spending a lot on your elderly parents doesn’t mean your income has declined.
While money spent on particular groups affects the amount of money left for other groups, it doesn’t mean that income has declined. Taxes and transfers cancel out; they don’t reduce GDP per person unless they discourage productive activity or productive investments.
Age structure and hours worked per worker (H/L)
What is the affect of aging on H/L, hours worked per worker? We can expect that to lessen as workers age, though some older workers