DEMOGRAPHIC DECLINE

Economic output depends on three factors:
capital, technology, and people.

Or even more simply:

Economic output = Number of workers X Average output per worker

Therefore, economic growth is dependent on only one of two things: a growing work force or improving productivity (technology deployment X capital investment).

While, for decades, predictable labor-force growth has been a steady tailwind driving economic growth, we are entering our first full decade in the modern era where that is no longer true.

This sea change stands in marked contrast to any time since the end of World War II. The post-war baby boom in Western Europe and the U.S. led to decades of steady growth in output and consumption. Increased levels of labor participation by women and ongoing immigration waves into Europe and the U.S. only added further fuel. The subsequent integration of China, India, and the former Soviet Bloc countries into the global economy in the 1990s kept that growth growing, almost doubling the number of workers participating in the global economy.

But the party is coming to an end, with a dependable economic tailwind turning into an economic drag. Not only is the global labor force not growing, but the costs of an aging population will be significant as we see pension and healthcare costs explode. By 2050, one in six people in the world will be over 65 years old, almost twice today’s levels.¹

To mitigate the impact, some governments may delay retirement ages, but there is a practical limit to how far that can be pushed. In addition, there is likely to be little public support. While increased immigration can help soften the blow, barriers towards immigration are going up, not coming down, in almost every country in the world.

This means that nearly all growth in the major economies will now need to come from productivity gains. Take the U.S., for example. Upward of 80% of economic growth (if not more) will need to come from increased productivity to maintain historic growth rates. In many European countries and Japan, that number is above 100%. China also will turn the corner this decade.

While there are some parts of the globe still seeing population growth—India’s population will continue to grow for at least the next 30 years, and the population of sub-Saharan Africa is expected to double over that same period—there are myriad challenges for these countries to fully capture the benefits of globalization. The Chinese miracle is unlikely to be repeated.

We are moving from an era of labor abundance to one of labor scarcity.²