CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press A Rapidly Aging Population Is Not a Depression Problem

A Rapidly Aging Population Is Not a Depression Problem

Friday, 15 August 2014 04:09

Matt O'Brien had a good piece in Wonkblog pointing out that the current downturn in the euro zone has been worse for these countries than the Great Depression. However it does get part of the story wrong.

At one point it outlines the troubles of the region:

"The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a "lowflationary" trap that makes it hard to grow, and is even harder to escape from. That's what happened to Japan in the 1990s, and now, 20 years later, its nominal GDP is actually smaller than it was then."

The aging of the population, and therefore a slow-growing or declining labor force, does not belong on the list of problems here. What matters for well-being is per capita growth. (That is not the only thing that matters, but insofar as GDP matters it is GDP per capita.) If the population is growing very slowly or even shrinking slowly, it will likely be associated with lower overall growth, but not necessarily with lower per capita GDP growth.

Germany has managed to get its unemployment rate down to 5.1 percent, compared to 7.8 percent before the downturn, in spite of having considerably lower growth than the United States over this period. Its employment rate for prime age workers (ages 25-54) has risen by 3.0 percentage points, compared to a drop of 3.5 percentage points in the United States. 

As a result of its slow population growth, few in Germany would see its slow economic growth as being a problem. In fact, most view the economy as being relatively prosperous right now. This is one of the reasons that the country is reluctant to support measures that would help its neighbors, since Germany is not really sharing in their pain at the moment. Similiarly, Japan's slow population growth meant that most people in the country were not suffering in the way that its weak GDP growth may have suggested.

Comments (8)Add Comment
Return of Malthus
written by Last Mover, August 15, 2014 6:57
The closest thing approximating good news was that Spain's dead-cat bounce recovery continued with 0.6 percent growth. But it still has 24.5 percent unemployment.

It is odd to hear this in the same context that compares Europe heading down the road of Japan. One would expect if Spain's population was shrinking like Japan it would eventually alleviate such high unemployment.

Of course such matters have relied heavily on the difference between short and long run in the past, but that difference has diminished given the nature of current chronic stagnation.

Taking O'Brien and others literally on the role of population implies in reverse, the historical period of Thomas Malthus and excess population so out of control all wages were driven to starvation subsistence levels - because they weren't offset by productivity gains.

O'Brien seems to conflate rising short term per-capita output of Spain as if it eliminated its high unemployment, with a falling per-capita output emerging after that for lack of available workers going forward.

At least in conventional terms the two are not comparable. The former is about productivity largely available from idle unused resources, while the latter is about growing productivity per unit of input over time at full employment.

In Malthusian terms, if Spain really was trapped at a 24% unemployment rate over the long term, the rational thing to do is reduce population, not increase it.
Silly Sequels?
written by Sendyntha Klownz, August 15, 2014 8:26
Malthus. Return of Malthus. Son of Malthus. Bride of Malthus. Malthus vs. The Wolfman the Logistics Curve. Malthus Meets Abbott and Costello Catastrophe Theory. ... The Story of eurO. 50 Shades of Germany. ...

Re Dean's title above: for some, like Mr. Williams, rapidly aging can lead to a depression problem.
High population growth is a tax on an economy. Slow growth, lower tax
written by Rachel, August 15, 2014 8:35

A rapidly growing population is always obliged to replicate rudimentary services. More roads required, more water, more sewers, etc. This generally comes at the expense of improvement. Thus when we are not obliged to build still more and more kindergarten classrooms, we have more resources available for universities and so forth.

The difficulty arises when the aging of the population leads to soaring health costs. This is not so much the case in Japan. But with the monopoly powers of the health care system in the US (and, sadly, our obesity rates), it's another story.
Germany: A Model of Low Wage Labor
written by Ellis, August 15, 2014 9:54
The German economy might appear to have a relatively low unemployment rate, but that is because a lot of the unemployed are not counted. They are slaving away at mini-jobs that pay almost nothing. You can't survive on those wages. Germany has one of the highest proportions of low wage labor among the 27 members of the Euro zone. Only six countries are worse: the three Baltic countries, Poland, Romania, and Cyprus.

Before the crisis hit in 2008, an OECD study found that in Germany, income inequality and poverty had been growing faster than in any other country in the OECD.

It isn't enough to cite a couple of statistics to make a point. The real issue is what is behind the statistics. Germany is no exception. Working people and the poor are getting hit real hard, just like in the rest of Europe.
Low population growth and inflation
written by Eric, August 15, 2014 1:07
Doesn't low population growth still affect GDP per capita by lowering inflation expectations and interest rates? Especially if the immediate impediment to economic growth is the ZLB?
written by bananaguard, August 15, 2014 2:39
"The aging of the population, and therefore a slow-growing or declining labor force, does not belong on the list of problems here. What matters for well-being is per capita growth."

This is fine as a free-standing statement. As a critique of some other guy's statement, it won't do. As a former denizen of the Fly-Over Territory, I can tell you that lower population is, in itself, a problem. Infrastructure is what it is. A sewer system sized for 100,000 households doesn't serve very well in a city with only 60,000 households. Services start to deteriorate when there aren't enough people to maintain it. We don't tear out the old system and put in a smaller one. We suffer along with the too-large system, with all the expenses that involves. Until we can't. Then, the sewer system begins to become unmanageable, and that means the town begins to become unmanageable. Same with schools, roads, debt, you name it.

This comes down to just another of the all-too-common practice of saying the other guy is wrong because he tells the story that interest him, not the story that interests, in this case, Dean.

Dean, ever dismissive of others' points of view.
written by skeptonomist, August 15, 2014 3:04
Average wages in Germany seem to have grown about as much as in the US since the downturn - see FRED, LCEAPR01DEA661N and LCEAPR01USA661S (or get the data directly from the OECD). This is not corrected for inflation, but inflation has not been high in Germany.
Go tell that to Krugman
written by Doug Rife, August 16, 2014 11:38
Paul Krugman would disagree and I can see why. Basically, an economy with a rapidly growing population demands more investment spending (both private and public) than one with slower population growth. That's important when you have an economy already suffering from insufficient demand that fails to fully utilize all of the productive resources available, especially people seeking and unable to find employment. When population is growing fast it puts pressure on business to expand capacity and that boosts business investment spending which adds to total demand. Of course, the government could, as in the case of Japan, step in a fill the gap in investment spending by say increased taxes on the wealthy. That would also tend to reduce income inequality would also boost demand but all else being equal slower population growth makes it harder for depressed economies to reach full employment.

Write comment

(Only one link allowed per comment)

This content has been locked. You can no longer post any comments.


Support this blog, donate
Combined Federal Campaign #79613

About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.