Donghyun Park is at The SEACEN Centre, Kuala Lumpur, Malaysia and Kwanho Shin is at The Korea University, Seoul, Korea
Population aging is widely viewed as detrimental to economic growth. The most prominent channel emphasized in the literature is the decline in the working-age population, which slows the growth of the labor force and economy. Yet in our recent paper, we offer a more optimistic view, as longevity increases and the older population becomes healthier.
Better health enables older workers to remain longer in the labor force, raising labor force participation generating the so-called ‘silver dividend,’ yielding potential economic benefits attributable to longer working lives in aging societies. In particular, the adoption of technologies that help older individuals work better can mitigate the negative effects of aging on economic growth. The silver dividend could substantially increase GDP.
There are multiple links between population aging and economic growth
In addition to the labor input channel, there are at least three additional channels through which population aging affects economic growth. First, older populations tend to dissave, thereby reducing aggregate savings and investment, harming capital accumulation and economic growth. Second, a decline in the number of children allows parents to invest more in their children’s human capital, which can contribute positively to economic growth. Third, older populations affect productivity growth but the direction of the impact is uncertain.
One view argues that population aging adversely affects growth because older persons can be less innovative and entrepreneurial. Yet another school of thought argues that population aging can positively influence total factor productivity (TFP). The underlying intuition is that labor scarcity creates stronger incentives for innovation.
All aging-growth links must be examined
To fully understand the effects of population aging on economic growth, it is important to examine the various channels collectively. In particular, the analysis should not neglect the potential silver dividend related to the positive impact of older workers working longer and thus expanding the labor force. Yet most existing empirical studies of the impact of population aging on economic growth fail to account for the silver dividend or all the channels.
In our paper, we address this gap in the literature by incorporating six major channels through which aging affects growth. These are 1) physical capital, 2) human capital, 3) average working hours, 4) labor force participation, 5) the share of the population age 15+, and 6) TFP. Channel (4) represents the silver dividend, while channel (5) represents the demographic deficit due to population aging. Our study utilizes data from 166 countries, including both advanced and less developed economies, spanning the period from 1960 to 2019.
There is a silver dividend but it is overshadowed by the impact of TFP
Our empirical analysis yields some interesting and significant findings. As expected, population aging has had a negative and significant impact on economic growth. Specifically, a 1 percentage point increase in the share of the older population is associated with a 0.23 percentage point reduction in annual per capita GDP growth rate over the next five years.
Nevertheless, a negative impact on the labor force is not the main channel through which population aging affects economic growth. In fact, the demographic deficit or the reduction in economic growth due to the reduction in the working age population is completely offset by the increase in labor force participation rate. Extended analysis indicates that the increase in labor force is driven primarily by growing labor force participation of older individuals. Apparently, the primary channel through which the demographic transition reduces economic growth is by reducing TFP. Indeed, the evidence indicates that the negative growth impact of aging can be fully explained by reduced TFP.
Improving TFP holds the key to sustaining growth amid population aging
The most significant and policy-relevant finding of our empirical analysis is that the adverse economic impact of population aging stems primarily from its negative effect on TFP growth, rather than from a reduction in the size of the labor force. This challenges the conventional wisdom that population aging inevitably leads to labor shortages, which, in turn, constrain an economy’s productive capacity. Consequently, policymakers in aging countries should prioritize strategies aimed at sustaining and enhancing TFP growth, rather than focusing solely on mitigating labor shortages.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.
