An older society does not mean a poorer one!

Economists, pundits and public policy makers have been trying to convince us for sometime now that the economy will soon face a very difficult challenge: that of an aging population.  The concern is two-fold.  As Canada’s new grey-haired population retires, the labour force will shrink thus slowing down economic growth. A recent study by the Caisses Desjardins in Quebec declared that the “growth of potential GDP (the economy’s long-term average growth rate) would drop substantially by 2021”. The problems is that the rising share of Canadians above 65 years old who consume services will rise from 13.7% in 2006 to 23.4% in 2031 according to Statistics Canada. Some provinces like Quebec could get close to 30%. Thus there will be more elders for every worker left. Globe & Mail columnist Jeffrey Simpson concluded from similar studies that “government finances will weaken: few tax revenues, more spending, chronic deficits, more debt. Health-care and education budgets will be squeezed”.  

It is not true to say that economic growth will surely grind to a halt or might even slow down. Several factors could play in to ease a transition. 

Labour force changes and sustaining productivity growth

As our elder (I am part of the young folks) retire, the labour force will indeed shrink and this will push wages up. A more expensive workforce will force businesses to adapt. They will find ways to retain and hire older workers or innovative methods of using their skills to maintain and improve their profitability. For instance, they could easily create new work arrangements like more flexible hours, job sharing, mentoring as to transfer knowledge to younger workers and inciting individuals to work at home.  As of now, this seems to be starting. The employment rate of the group of workers about 65 years old has gone from 5.9% in 2001 to 9.8% in 2008. There is every reason to believe that this figure will go up even more. Businesses could also try to be more family-friendly by offering some form of family care program in order to attract more mothers and married women. If the employment rate of males is at 68% in 2008, that rate is at 59.3% for female. True, that rate is up from a decade earlier when it stood at 53.7%, but if businesses can find ways of getting mothers back to work in one form or another, that might provide a boost. According to a 2008 paper by Vodopivec and Dolenc, the increase of workforce participation rates for old workers (we can also add female and probably even immigrant workers) would be a countervailing factor that could possibly assure that economic growth won’t slow down.  

Furthermore, we must remember that the output of an economy is the result of how that economy combines labour, capital and technology. Economies can be more labour-intensive than others found ways to increase output per unit of labour (labour productivity) by ingenious combinations of capital and technology. As wages rise because of the smaller labour supply, businesses will find ways of substituting relatively cheaper capital to replace more expensive labour.  That may mean increased mechanization of industries and the rise of capital-intensive industries. What matters when we talk about the wealth of a nation is its productivity, or output per worker.  When we look at the growth of GDP per capita for Canada since 1960 and multifactor productivity growth, we see that both rates are consistently similar (see graph 1). Therefore, sustaining a steady productivity growth rate over time should be the focus, not the size of the workforce. If we do sustain a fast and steady rate of productivity growth, we will have a bigger wealth base to tax to meet growing expenditures.  The number university degrees, diplomas and certificates granted by educational institutions each year has increased by 33.77% between 1992 and 2008. This increase in the formation of human capital should encourage us about prospects of higher productivity growth. 

However, there is a strong underlying hypothesis to the case I have laid out above: free factors markets. The aging population will only become a problem if the government suffocates the economy and its attempts to adapt. In their paper, Vodopivec and Dolenc say that “restrictive employment protection legislation (…) may create disincentives for employment of old workers” and that in order to induce employers to hire old workers, they suggest “removing the obstacles imposed by restrictive labour market institutions”.   A heavier taxation of capital could also stifle the adaptation process. Thus, if governments want to avoid a slower economic growth, they could aim to shift their tax systems away from capital and income and more towards consumption and user fees for public services.