Global Ageing: What is at stake? - by Börsch-Supan - Oxford Institute ...

tivity would need increase by 40%, probably an unrealisticfigure.The variability range for this forecast is large and almostentirely depends on future labour force participation of theyoung, the elderly and the female. In most pessimisticscenarios of unchanging labour force participation, theimpact of the declining support ratio is huge. On the otherhand, in an optimistic scenario of Denmark-style labourmarket reforms, the shift in the age structure is compensatedfor almost entirely by the increase in participationrates.This example bears several lessons for policy in times ofglobal ageing. First, the huge variability of the projectionsand the leverage of employment on GDP make clear thatit is important to better understand how public policy caninfluence labour force participation rates. Structuralreforms such as education reform and pension reform havepotentially huge “side-effects” on GDP growth throughtheir impact on employment, over and above the oftenmore prominently discussed impacts on social budgets.Second, the above example shows how strongly the differentialforce of global ageing depends on to the extent towhich an increasing quality of labour will compensate forthe decreasing quantity of labour. “Side effects” of structuralreforms on productivity may in the long-run dominateany direct but static effects, because they change thegrowth path of the economy.Not only the size but also the age structure of the workingpopulation will change radically in the coming decades.We again use Germany as an example for how dramaticthe change will be. The modal age of the German workforce in the year 2000 was around age 36; in 2010, thispeak age will increase to 46 years; and a further 10 yearslater it will be 54 years. The baby boomers then retire –the age distribution curve flattens out and changes verylittle in the following decades.This fundamental change in the age structure of theworking population will have profound effects on themicroeconomics and the sociology of the labour market.The most important – and most controversial – aspect isthe potential effect on labour productivity. If labourproductivity is age dependent, a shift in the age structurewill also bring about a change in aggregate productivity,even if age-specific productivity were to remain constant.We know little about the size of these effects. Rather, moreresearch on age-specific productivity is needed to betterunderstand whether ageing economies will suffer from aproductivity decline, amplifying the effects of a shrinkingquantity of labour. At the very least, however, we understandthat further education increases productivity – andherein lies an important policy message: prevent all actionsthat make further education less attractive, and strengthenall steps that increase the investment value of further education– such as a later retirement age.Interactions between labour, product andcapital marketsThe labour market is not insulated from other markets. Itis not only directly affected by population ageing, but alsoindirectly by ageing-induced changes in product and capitalmarkets.Product demand will change, since an older population ofconsumers has different preferences and needs than ayounger population. Consumption demand may also declinefor at least two reasons. First, because GDP per capita willdecline in the face of a shrinking labour force unless thisis offset by higher capital input and productivity. Secondand more subtly, it is likely that more retirement incomecomes from asset income which fluctuates more than annuitizedpension and labour income. This will increaseprecautionary savings and depress consumption, given afixed level of income.Consumption behavior changes with increasing age. Forexample, spending on goods in the group “transport andcommunication” falls over the life cycle, while goods inthe “health and hygiene” group, as well as costs of shelter,account for a growing share of older households’ budgets.Hence, if the age distribution of an economy is changing,the composition of consumption will change accordingly.Most notably the aggregated expenditure on health willincrease during the ageing process while the correspondingspending on transport will decline.Changing product demand will then precipitate shifts insectoral labour demand. Employment in the health sectorwill increase; it will decline in the transport sector. Someestimates suggest that more than a sixth of all workers willneed to change their jobs due to population ageing.Labour supply is also affected by capital market fluctuations.The more retirement income is provided throughfunded pension income (e.g., 401k plans or other individualaccounts invested in the stock market), stock marketperformance will, at the margin, affect the retirement decisionof workers as well as their consumption demand.Understanding this mechanism is important for analyses ofglobal ageing since it may substantially amplify capitalmarket disturbances. Stock markets have exhibited hugeswings, and we do not fully understand how bubblesemerge and even less how to predict and prevent them.This topic has a clear political dimension since the flexibilityof choosing the retirement age is a core transmissionmechanism for these interactions between the capitalmarket on one side and labour and product markets on theother side.Capital marketsCapital markets play a crucial role in global ageing sincecapital is the factor which moves with the least frictionsAGEING HORIZONS Issue No 4OXFORD INSTITUTE OF AGEING4