Why Productivity Growth is Faltering in Aging Europe and Japan

IMF Blog, December 9, 2016

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Many countries are experiencing a combination of declining birth rates and increasing longevity; their populations are aging.
Economic consequences of aging highlighted:
- Health care costs rise, mainly because older people need more of it.
- Pension payments—whether from public or private plans—also increase while there are relatively fewer younger workers paying into the pension systems.
- Fewer people producing goods and services relative to the total population.
Old-age dependency ratio defined: the number of people over 65 divided by the number of people between 15 and 64.

Boosting productivity (more goods and services produced per worker) is a potential way to alleviate strains from aging.
Total Factor Productivity (TFP) described as the portion of economic growth not the result of changes in inputs (such as capital and labor); it measures how efficiently capital and labor are used and is affected by innovation, institutions and the quality of the workforce.
Age–productivity profile noted: productivity generally increases until workers are in their 40s, then tails off until they stop working.

Workers in the 40 to 49 age group were the most productive in Japan, with productivity declining after that.
Authors Yihan Liu and Niklas Westelius calculated that the aging workforce could have reduced Japan’s annual total factor productivity growth by as much as 0.7–0.9 percentage points between 1990 and 2005.
The decline was largely due to the reduction in the 40 to 49 age group.
Starting in 2010, the 40 to 49 group increased a bit, but after 2025 shifts in the working age population will again reduce total factor productivity growth.

Authors Shekhar Aiyar, Christian Ebeke, and Xiabo Shao found that the growing number of workers aged 55 and older on average “lowered total factor productivity growth by about 0.1 percentage points each year over the past two decades.”
Cross-country variation: in Latvia, Lithuania, Finland, the Netherlands, and Germany, workforce aging shaved about 0.2 percentage points off annual total factor productivity growth.

Under current demographic projections, workforce aging will intensify in Europe from 2014 to 2045.
Projected impacts on annual total factor productivity growth:
- Europe overall: could reduce annual total factor productivity growth by 0.2 percentage points.
- In countries where aging will be most pronounced—Greece, Hungary, Ireland, Italy, Portugal, Slovakia, Slovenia, and Spain—annual total factor productivity growth could be reduced by as much as 0.6 percentage points.

Broadening access to medical services to improve the overall population health;
Improving workforce training;
Reforming labor markets to make it easier for older workers to change jobs; and
Promoting technological innovation to improve overall productivity—among other things, through increased spending on research and development.
Note: To the extent that such changes (for example, devices that reduce physical labor associated with manufacturing) disproportionately benefit senior workers, they could mitigate the adverse effects of an aging workforce on total factor productivity growth.

Why Productivity Growth is Faltering in Aging Europe and Japan — iMFdirect, December 9, 2016.