Demographic Effects on Economics

July 20, 2008 • Daily Email Recap

David Bloom-Population and Economics (PDF, 484KB)

I recently read this interesting paper by David Bloom and David Canning, which is being published by Population and Development Review. It is an excellent analysis, although I think the paper could give more attention to the mechanism by which lower fertility leads to greater savings. It refers to longer life spans giving incentive to save for retirement, but it seems to me, that while it refers to work by Princeton demographer Ansley Coale, it skips over Coale’s contention that lower fertility allows less of family income to be spent on food, housing and clothing for children, automatically freeing up some funds to be used for: a. savings, thus building capital for business to borrow and grow; b. education and infrastructure, thus building economic productivity; and c. elective goods, thus stimulating the manufacturing sector.

Alternatively, the economies of many high fertility countries, such as those in Africa, are being damaged by the fact that a high percentage of personal and national income is spent on the immediate survival needs of food, housing and clothing–because there are too many children dependent on each working adult – leaving little income at the personal or national level available to form investment capital. Lack of investment capital depresses growth of productivity of industry and leads to high unemployment (which is exacerbated by rapid growth in the numbers seeking employment). Lack of capital also contributes to a country’s inability to invest in education, government, infrastructure, environmental needs and other areas that can contribute to the long-term productivity of the economy and living standards of the people.

Another comment has to do with figure 6 of the paper, which shows ratios of workers to dependents for Japan broken out between elderly dependents and youth dependents. I contend that there is a material difference in the nature of dependency of youth and elders, especially in a country like Japan. The aged in most developed societies have savings and many have retirement plans that cover a good deal of their living expenses, while youth are not only wholly dependent, but are almost parasitic, in that those who pursue higher education impose huge costs on their parents. As the authors point out, the elderly also have some options for extending their working careers. The savings and investments of the elderly also build capital availability for use by businesses to expand. Too many economists and demographers treat the two types of dependency as being the same. I think it would be interesting for to rerun the various models referred to in the paper just focusing on youth dependency, to assess the impact of demographic changes on economic prospects caused by this factor alone. Indeed, as shown in figure 6, youth dependency is declining in aging societies. The models for the aged need to be made more sophisticated to really get at their impact on economic prospects, recognizing the tradeoff between those who are independent and adding to capital availability and those who are relying on funds provided by children and/or the government.

Best wishes,
Bill


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