By Christophe André, Peter Gal, Álvaro Pereira and Matthias Schief
People in OECD countries are, on average, living longer and often ageing in better health than in the past. This a major and welcomed achievement. Nevertheless, rapid ageing in most advanced and many emerging economies also raises concerns about productivity and economic growth (Andre, Gal and Schief, 2024) as well as fiscal sustainability (Rouzet et al., 2019; Crowe et al., 2022).
The steady increase in the share of older people as longevity increases is currently compounded by a cohort effect, as the relatively large cohorts born in the middle of the 20th century retire and are replaced by smaller cohorts, reflecting fertility declines over the past decades. The fall in the share of workers in the population is set to reduce, all else equal, per capita income across the OECD by nearly 8% over the next three decades, with some countries experiencing up to a 20% shortfall. While an extension of working lives resulting from additional years of healthy life would mitigate the fall in GDP per capita, it would generally not be sufficient to fully offset it (Figure 1).
Figure 1. Ageing will weigh on GDP per capita, even with longer working lives
Note: The figure shows the estimated impact on GDP per capita of the projected change in the share of workers in the population, everything else equal, under two scenarios. The first one assumes fixed age-specific employment rates. The second one allows employment rates to move in line with healthy ageing, with each year of increased life expectancy assumed to reduce the effective age of older workers by two-thirds of a year for employment rate calculations based on the observed relationship between life expectancy and healthy life expectancy increases in the past (see more details in the source).
Source: Andre, Gal and Schief (2024) using data on age-specific employment rates from the OECD and population projections from the 2022 revision of the UN World Population Prospects.
Drawing an analogy with climate change, one can think of two policy approaches towards ageing: mitigation and adaptation. Mitigation would aim to prevent further ageing by raising fertility rates and immigration. Fertility is crucial to prevent a fall in population. However, a rise in today’s fertility rates would only raise the share of workers in the population in about two decades, when today’s newborn enter employment. Furthermore, measures promoting fertility have so far had limited success (Shen et al., 2020) and although policies to reconcile work and parenthood can support fertility (Fluchtmann, van Veen and Adema, 2023), their impact remains highly uncertain. Immigration can have a sizable impact on population growth and, with the help of well-designed integration policies, contributes to economic dynamism and innovation (Bernstein et al., 2022). However, even if immigration is important in some individual countries, stabilising the OECD-wide old-age dependency ratio would require much higher net immigration rates than those observed since the turn of the century.
Given the limited scope to mitigate ageing, OECD economies and societies will have to focus on adapting to it. Healthy ageing is a pre-condition for prolonging working lives, which should be supported through better integration of individuals in the economy and society, promoting healthier lifestyles at all ages, adapting health systems, and improving social and environmental health determinants. Fighting age discrimination and removing disincentives to continued work at older ages embedded in pension systems and other institutional arrangements is also crucial.
In many countries, there is scope to increase labour participation in younger groups as well, notably women and youth. Beyond quantity, the quality of jobs can be improved, by promoting better work-life balance – which would also favour gender equality and may help raise fertility rates – and by investing in skills, improving labour market matching and productivity.
Indeed, demographic headwinds could be offset by rising output per worker. Understanding how population ageing itself impacts productivity growth is therefore crucial. There are various micro- and macro-economic channels to consider, pointing in different directions (Table 1).
Table 1. Productivity and ageing: A summary of the evidence
Note: This table summarises findings in the literature along two dimensions: the main mechanism through which ageing may impact productivity (captured by rows 1- 6) and the various dimensions of ageing that are mostly mediating the effects (columns I.-III.). The studies and reports underlying this table are discussed in Sections 3.1-3.7. of the source.
Source: Andre, Gal and Schief (2024).
At the more microeconomic level, workers’ productivity increases with experience but may decline at older ages due to poor health or obsolescence of skills. Notwithstanding, the impact of ageing on firms’ productivity is unclear, as younger and older people work in teams and can complement each other (OECD, 2020). However, ageing tends to reduce innovation and business dynamism (Hopenhayn et al., 2022). Conversely, ageing incentivises automation, which can raise productivity. Artificial intelligence may offer new opportunities to overcome the ageing challenge, notably through alleviating labour shortages (Filippucci et al., 2024).
Ageing can also impact productivity through macroeconomic and financial developments. Savings accumulated by older generations can boost investments, but a lower bound on interest rates could prevent interest rates from falling enough, leading to secular stagnation (Eggertson et al., 2019). Risk-aversion among older people may direct savings towards conservative investments, at the expense of innovation financing. Rising age-related government spending may crowd out productivity-enhancing investments, while tax distortions may slow productivity growth, as would demand shifts towards lower-productivity services, like leisure or elderly care. This co-existence of positive and negative effects may explain that so far ageing has not been associated with lower GDP per capita (Acemoglu and Restrepo, 2017).
In sum, policies should reconcile the individual benefits from living longer with the societal challenges that this may create, not only by efforts to mitigate, but also to adapt to ageing. This involves promoting healthy ageing, removing obstacles and disincentives to extending working lives, mobilising labour resources in all age groups, encouraging lifelong learning, and supporting business dynamism.
References
Acemoglu, D. and P. Restrepo (2017), “Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation”, American Economic Review, Vol. 107/5, pp. 174-179, https://doi.org/10.1257/aer.p20171101.
Andre, C., P. Gal and M. Schief (2024), “Enhancing Productivity and Growth in an Ageing Society: Key Mechanisms and Policy Options”, OECD Economics Department Working Papers, No. 1807, OECD Publishing, Paris, https://doi.org/10.1787/605b0787-en
Bernstein, S., R. Diamond, A. Jiranaphawiboon, T. McQuade and B. Pousada (2022), “The Contribution of High-Skilled Immigrants to Innovation in the United States”, NBER Working Papers, No. 30797, National Bureau of Economic Research, Cambridge, MA, https://doi.org/10.3386/w30797.
Crowe, D., et al. (2022), “Population ageing and government revenue: Expected trends and policy considerations to boost revenue”, OECD Economics Department Working Papers, No. 1737, OECD Publishing, Paris, https://doi.org/10.1787/9ce9e8e3-en.
Eggertsson, G.B., M. Lancastre and L.H. Summers (2019), “Aging, Output Per Capita, and Secular Stagnation”, American Economic Review: Insights, 1 (3), 325-42, https://doi.org/10.1257/aeri.20180383.
Filippucci, F., et al. (2024), “The impact of Artificial Intelligence on productivity, distribution and growth: Key mechanisms, initial evidence and policy challenges”, OECD Artificial Intelligence Papers, No. 15, OECD Publishing, Paris, https://doi.org/10.1787/8d900037-en.
Fluchtmann, J., V. van Veen and W. Adema (2023), “Fertility, employment and family policy: A cross-country panel analysis”, OECD Social, Employment and Migration Working Papers, No. 299, OECD Publishing, Paris, https://doi.org/10.1787/326844f0-en.
Hopenhayn, H., Neira, J. and Singhania, R. (2022), “From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share”, Econometrica, 90: 1879-1914. https://doi.org/10.3982/ECTA18012
OECD (2020), Promoting an Age-Inclusive Workforce: Living, Learning and Earning Longer, OECD Publishing, Paris, https://doi.org/10.1787/59752153-en.
Rouzet, D., et al. (2019), “Fiscal challenges and inclusive growth in ageing societies”, OECD Economic Policy Papers, No. 27, OECD Publishing, Paris, https://doi.org/10.1787/c553d8d2-en.
Shen, K., F. Wang and Y. Cai (2020), “Government policy and global fertility change: a reappraisal”, Asian Population Studies, 16(2), 145-166, https://doi.org/10.1080/17441730.2020.1757850.