Further to my post at the end of last week, this blog from the London School of Economics Business Review contains some further interesting points and conjectures about the economic effects of population ageing and decline.

It starts by noting that the post-WWII baby boom, followed by a declining birth rate and rise in life expectancy, led to a sharp increase in the world’s working population (both absolutely and as a ratio to the number of non-working dependents). These demographic forces have led to the following trends:

  1. the off-shoring of manufacturing production

  2. the stagnation and sometimes decline of the real wages of median workers as labour became more plentiful

  3. a collapse in the membership and power of trade unions

  4. an increase in inequality within countries

  5. a decrease in inequality between countries

  6. deflationary pressures (apart from commodities)

  7. decreases in nominal and real interest rates.

But now these underlying demographic trends are slowing down and reversing. The ratio of dependents to workers is going to rise in most of the globe. So, many of these economic trends we have become used to will also change. The blog (which is drawn largely from a paper presented to the June 2016 BIS Conference by Manoj Pradhan and Charles Goodhart) claims that the years to come could see an increase in national production to the detriment of free trade, rising real wages and greater labour power, less inequality in countries and more inflation and higher interest rates.

The drop in the number of workers will lead to greater unit labour costs and taxation will “rise sharply” to pay for the old’s pensions and medical expenses.

The authors doubt that there is the political will to greatly raise the retirement age and cut back medical schemes for the elderly, and that robotics will not be able to make up for the large fall in the working population. While India and Africa could eventually take the place that China and East Asia held during the late 20th Century as the source of ever more cheap labour, the infrastructure and governance for this to happen is not yet in place.

The argument that interest rates will rise is a scary thought with so much of the world burdened with massive amounts of debt. The blog’s concluding paragraph is grim indeed:

“As the US recovers from the global financial crisis and tries to renormalize interest rates, the adverse effect of that on the rest of the world feeds back to the US economy, and thereby slows down that rise. But at some point (who knows when?), labour market tightening in recovering countries, driven by demographic change, will put upwards pressure on wages, unit labour costs and inflation. The Phillips curve is sleeping, not dead. What then? A mixture of defaults in the weaker countries/sectors, and inflation in the stronger countries/sectors?”

We often think that what we are used to will continue forever. My entire working life has been characterised by an economy with low-inflation, low wage growth, and low interest rates. Many of my peers have massive loans and can service them because the cost of money is cheap. The price of goods, including oil, continues to decline.

In short, it has been a good time to be a wage earner and not so good to be relying on savings. But there is no guarantee that the next 15 years or 30 years will continue on this same path. In fact, if working populations decline as they are set to do, the demographic underpinning of the last few years will flip. There is little doubt that the economic superstructure will be affected as well.