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June 7, 2017

Does an older population crimp economic growth?

Having an aging workforce doesn't necessarily mean that a country's GDP is set to fall.

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People around the globe are living longer than previous generations.

This may be a testament to advances in modern medicine, but a rapidly aging population potentially is a serious threat to the world’s economy.

Economies with a lot of older workers face a number of challenges, including that those people will be less productive and also drop out of the labor force, which could drag down economic growth. This comes at a time when declining fertility rates have contributed to a shortage of middle-age workers in Europe and some Asian countries.

A paper in the American Economic Review: Papers & Proceedings, published in May, says concerns about an aging population’s impact on the economy may be overblown.

Authors Daron Acemoglu and Pascual Restrepo found that there was no evidence that aging had a negative effect on GDP per capita.

Figure 2 from Acemoglu, et al. (2017)

Figure 2 shows the correlation between growth in GDP per capita and an aging population (defined as the ratio of people over the age of 50 to those between 20 and 49). Looking at data from the Penn World Tables and the United Nations for 169 countries over a 25 year span, the authors found the relationship to be insignificant

So why didn’t an older population drag down GDP growth? The authors suggest that robotics and artificial intelligence have helped companies offset any negative impacts from having a wave of retiring workers by replacing them with technology, such as robots and artificial intelligence, that emerged in the 1990s.