RBA debunks ageing population alarmism


By Leith van Onselen

For more than a decade, the Productivity Commission (PC) has debunked the common myth that immigration can overcome population ageing. For example:

  • PC (2005): Despite popular thinking to the contrary, immigration policy is also not a feasible countermeasure [to an ageing population]. It affects population numbers more than the age structure”.
  • PC (2010): “Realistic changes in migration levels also make little difference to the age structure of the population in the future, with any effect being temporary“…
  • PC (2011): “…substantial increases in the level of net overseas migration would have only modest effects on population ageing and the impacts would be temporary, since immigrants themselves age… It follows that, rather than seeking to mitigate the ageing of the population, policy should seek to influence the potential economic and other impacts”…
  • PC (2016): “[Immigration] delays rather than eliminates population ageing. In the long term, underlying trends in life expectancy mean that permanent immigrants (as they age) will themselves add to the proportion of the population aged 65 and over”.

In a nutshell, trying to overcome an ageing population through higher immigration is a Ponzi scheme. It requires ever more immigration, with the associated negative impacts on economic and social infrastructure, congestion, housing affordability, and the environment.

Economists at MIT also recently found that there is absolutely no relationship between population ageing and economic decline. To the contrary, population aging seems to have been associated with improvements in GDP per capita, thanks to increased automation:

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If anything, countries experiencing more rapid aging have grown more in recent decades… we show that since the early 1990s or 2000s, the periods commonly viewed as the beginning of the adverse effects of aging in much of the advanced world, there is no negative association between aging and lower GDP per capita… on the contrary, the relationship is significantly positive in many specifications.

Now you can add the Reserve Bank of Australia (RBA) to the list of institutions debunking the myth that population ageing necessarily leads to economic decline. In a new Bulletin Article, the RBA explicitly notes that while ageing of the workforce has tended to reduce labour supply, this has been mostly offset by increased labour force participation of women and older people:

The changing age structure of the population has been a persistent and increasing drag on labour force participation across advanced economies since the mid 1990s (Graph 5). The demographic drag has been widespread, reflecting the broad-based decline in the share of the prime-age population. It has been the largest in Japan, averaging around one-third of a percentage point per year over the past two decades.

Rising female workforce participation over the past few decades has largely made up for the demographic effects of ageing. This positive contribution from rising female participation has been common across advanced economies, although the timing has differed, with changes having occurred earliest and fastest in the United States and Canada. Australia has seen a consistent rise in female participation…

The increasing participation of older cohorts in the workforce has occurred alongside significant improvements in health outcomes and life expectancy. Furthermore, increasing longevity incentivises people to work longer to ensure they have adequate savings for retirement. The labour force participation rate of people aged 55 and over has been rising steadily since the mid 2000s across advanced economies, partially reversing a multi-decade decline in the average age of retirement (OECD 2015a). Over the past decade, the participation rate of people in advanced economies aged 55–64 years old and 65 years and over has increased by an average of 9 and 4 percentage points, respectively (Graph 7). For most countries, participation rates of older women have increased by more than those of older men from comparable age cohorts over this period…

Across advanced economies, the gap between the participation rates of older people and those of prime-age workers is gradually narrowing. This is particularly the case for the 55–64-year-old cohort, which now has a participation rate of less than 20 percentage points below the prime-age cohort in most advanced economies…

As the population in advanced economies ages further it will continue to put downward pressure on the supply of labour; the participation rates of specific cohorts are also likely to continue to change.

…while ageing will put downward pressure on participation rates in all advanced economies, increases in cohort-specific participation rates could largely offset this. Despite this, labour force growth is still expected to slow sharply in advanced economies due to slower population growth. This reduction in labour supply is likely to tighten the labour market, all else being equal…

Demographic change is a key driver of labour supply trends. Population ageing has reduced growth in the labour force across advanced economies, although strong migration has lessened some of this impact in Australia. Increased female and elderly workforce participation has partially offset the downward pressure from ageing. Projections show that continued growth in participation by these groups can continue to counterbalance some of the substantial effects of ageing on aggregate participation. Nonetheless, overall growth in the labour force and total hours supplied will continue to slow, all else being equal.

The broader macroeconomic consequences of these developments are uncertain, as demographic change can influence both potential and actual output. Subdued trend growth in labour supply will lower potential output growth and tighten the labour market, all else being equal. This would put upward pressure on wages and inflation.

If Australia was truly a ‘clever’ country, it would manage population ageing by: 1) better utilising existing workers, given there is significant spare capacity in the labour market; and 2) where required resort to technological solutions, as has occurred in Japan.

The last thing that Australia should be doing is running a mass immigration program which, as noted many times by the PC (and elsewhere) cannot provide a long-term solution to ageing, and places increasing strains on infrastructure, housing and the natural environment.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.