The world has been stuck in an era of slow economic growth over the past decade. Top economists and policy makers have proposed a number of explanations for the economic slowdown, but in the end, there’s no consensus on the reasons, on how long the slowdown will likely last, or on what to do about it.
Economic growth has two main components, productivity growth and the growth of the labor force. One potential theory for our stagnant economic growth is demographics, namely, the rapidly declining population and labor force growth around the world.
The current world’s population is 7.7 billion. The UN Population Division estimates that global population will reach 9.8 billion with a growth rate of 0.5% in 2050, and will peak around 2100 at roughly 11.2 billion with a growth rate of 0.1%. Other projections estimate that the population will grow slower, peak at 9.4 billion around 2070 and then decline to around 9 billion in 2100. Some project that after reaching a peak of 9 billion, the world’s population will decline back to today’s levels, - around 7 billion, - by 2100.
Japan and a few other countries are already experiencing population declines. The US population is currently around 330 million, and is projected to reach 390 million in 2050 and 450 million in 2100. While the US birthrate hit a historic low in 2017, the population has continued to grow due to immigration. The US growth rate is 0.71% including immigration and 0.43% without.
The global labor force grew at an average of 1.8% per year between 1960 and 2005, but since then it’s been growing at just 1.1% per year. The labor force is still growing in some developing countries like India, Nigeria and the Philippines, but it’s already shrinking in China, Japan and Germany. In the US, the labor force is growing very slowly, - 0.5 percent per year over the past decade, compared with 1.7 percent from 1960 to 2005. Given the continuing decline in fertility rates in most parts of the world, the global labor force is expected to slip further in the coming decades.
“The rapid aging of the population of both developed economies and much of the rest of the world,… is seen as one of the most dangerous economic ills of the next several decades,” wrote economic professors Daron Acemoglu and Pascual Restrepo in a 2017 paper. Older populations not only reduce labor force participation, but also lead to lower productivity, given that workers’ productivity and earnings have been shown to peak in their 40s. One might thus expect that countries undergoing faster aging would be most affected by slower economic growth and GDP per capita. But, in fact, this is not the case. “If anything, countries experiencing more rapid aging have grown more in recent decades… The lack of a strong negative association between changes in age structure and changes in GDP per capita is surprising. So what explains it?”
In Demographics and Automation, published in March, 2019, Acemoglu and Restrepo analyzed the impact of an aging labor force on economic growth and automation based on a simple model of technology adoption and innovation. Workers were classified into two age groups: middle-aged, - those between the ages of 21 and 55; and older, - those 56 and higher. These workers were allocated across different tasks and industries. The model assumed that middle-aged workers have a comparative advantage in physically oriented production tasks while older workers specialize in non-production services.
“In our model technology is endogenous: firms can invest resources to automate and substitute machines for labor in production tasks, and will have stronger incentives to automate when the middle-aged wage is greater,” noted the authors. “Using this framework, we show that demographic changes that reduce the ratio of middle-aged to older workers induce the adoption of additional automation technologies.”
Let me briefly summarize their key findings and predictions.
First, the model predicts that an aging workforce leads to greater automation, especially in production oriented industries that rely more on middle-aged workers and whose tasks are more amenable to automation by robots and related technologies. An analysis of data from various sources verifies these predictions. The more rapid the aging of a country’s population, the greater their use and development of industrial robots and automation to make up for the relative scarcity of middle-age workers.
Countries experience more rapid aging, - e.g. Japan, Germany, South Korea, - are also the ones at the forefront of adopting industrial robots. South Korea has 20.1 industrial robots per thousand workers, Germany has 17.0 and Japan 14.2. The US lags behind at 9.1 industrial robots per thousand workers. Part of the reason is that the US, and to some degree the UK, are not aging as rapidly as South Korea, Germany and Japan. Germany has deployed industrial robots at almost twice the rate of the US. If the US had the same demographic trends as Germany, the paper predicts that the gap would be 25% smaller.
Acemoglu and Restrepo also investigated whether demographic pressures have an impact not just in the use of robots and other automation technologies, but on the actual development of robots, other industrial automation technologies and patents. In all cases, the analysis showed statistically significant correlations. For example, Germany and Japan each have six major producers of industrial robots, while the US, - which as we’ve seen is aging less rapidly, - has only one.
Beyond robots, the analysis found a strong effect of aging on countries with the highest shares of exports of industrial automation technologies. To verify the accuracy of their findings, the authors analyzed whether there were positive correlations between aging and the exports of technologies not related to industrial automation. They found no such correlations. They performed a similar analysis with patents related to industrial automation, and once more found a significant correlation between aging and the number of such patents, but no correlations between aging and patents not related to industrial automation.
Finally, Acemoglu and Restrepo analyzed the relationship between an aging labor force and productivity as measured by the value added per worker. In general, the productivity implications of aging are ambiguous. “On the one hand, demographic change might reduce the number of high-productivity middle-aged workers relative to lower-productivity older workers. On the other hand, demographic change might increase productivity because of the technology adoption it induces.” While the main effect of aging on productivity is ambiguous, “in the presence of demographic change, industries with the greatest opportunities for automation are experiencing more rapid growth of productivity and greater declines in labor share relative to other industries.”
In their concluding paragraph, the authors remind us that while their research has been focused on production tasks in manufacturing, a much broader set of tasks across a wide variety of industries are now open to automation, - given the continuing advances in AI and other technologies. Much research remains to be done on the relationship between aging populations, economic growth and automation.
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