Growth of the aged population can pose a problem
I am writing this as I sit in my temporary office in Osaka University. Like all university campuses, the university campus here too is full of young people. But what is different from university campuses in most countries is the world outside the campus. Even casual empiricism suggests that the number of relatively old people is much more than in, say, Calcutta or New Delhi, and indeed in cities in most parts of the world. The number of 'old' people - those above 65 years - constitutes 27 per cent of the total population in Japan. This is the highest ratio in the world. What is more alarming is that in 2014, the percentage was about 25.8 per cent. This shows that the number is rising rapidly each year. One prediction estimates that if current trends persist, then nearly a third of the Japanese people will be senior citizens by 2030.
Of course, Japan is not the only country in the world with a relatively large number of old people. Populations in several Western European countries have a similar age composition. For instance, roughly one in five in Germany, Portugal, Greece and Italy are over 65 years old. Several countries in Eastern Europe - for example, Russia and Ukraine - also have a relatively large number of aged people.
Demographers describe how the interaction between the birth rates and death rates results is different stages of what has come to be called the demographic transition. The first stage is marked by both birth and death rates being quite high. In the second stage, the birth rate remains high, but the death rate drops because of modern medicine, improvements in sanitation and better diets. This leads to an increase in population. The third stage is characterized by a fall in both rates leading to a smaller increase in population. Birth and death rates are both low in the fourth stage, resulting in a more or less stable population level.
These four stages have been the received doctrine so far. But, perhaps the recent experience of Japan and European countries in particular suggests the need to introduce a fifth stage. In such countries, birth rates have fallen significantly below the replacement level of 2.1 live births per woman. At the same time, continued improvements in medical knowledge have increased rates of life expectancy so much that more and more people cross the threshold of 65 each year. This process leads to a significant increase in the proportion of senior citizens. Unless there is a dramatic increase in birth rates, a rapidly shrinking population will only exacerbate the proportion of senior citizens.
The phenomenon of aging has important economic and social consequences, none of them something to look forward to. An obvious economic outcome is that fewer persons have to earn enough to take care of more and more people. Demographers talk of the dependency ratio - the ratio of the number of children below 15 years and those who are 65 years and more to those who are of working age defined to be between 15-64 years. In Japan, this is currently just over 65 per cent. Relatively few women work in Japan, much less than half of those included in the potentially working age population actually work. This means that each worker has to support about five persons.
Public budgets in all countries with high dependency ratios and good social security measures are under increasing strain. For instance, several countries had adopted pay-as-you-go pension plans under which employees make contributions and are promised pensions which are a proportion of their final salaries at retirement as long as they live. But, with life expectancies being as high as they are, it is becoming harder and harder for governments to meet their pension contributions. An obvious reaction is to push back the age of retirement so that employees will have to pay in for more years and receive the benefits for fewer years.
A favourite concept of economists is the "production function", which describes the way in which different factors of production such as capital and labour are combined to produce outputs. A typical assumption is that labour and capital can be substituted for each other to any degree. In actual practice, technological possibilities are significantly more limited. After all, outside the world of science fiction, there is a limit to the functions that robots can perform. Several countries are facing acute labour shortages because they do not have enough workers. This, rather than lack of demand or other inputs, is acting as a constraint on aggregate production. For instance, Japan is hosting the Olympic Games in 2020. There is worry that the lack of workers in the construction industry may mean that some buildings and other infrastructural projects are not ready for use at the start of the Games.
Countries are responding to the skewed age composition of their populations in different ways. The Japanese government is encouraging employers to adopt flexible work practices such as shorter hours of work or part-time employment in the hope that this will attract more women to enter the workforce and older men to push back the date of retirement. Hitherto 'closed' Germany has gradually changed its immigration policy and is admitting foreign workers in significantly greater numbers. France has for a long time tried to attack the problem at its source by providing tax incentives to couples who have more children. This policy has been partially successful. The birth rate is gradually inching up, and is now within smelling distance of the replacement level.
Of course, the situation in India (and several other developing countries) is dramatically different. It is perhaps at the border of the second and the third stage of the demographic transition, with the population growth having slowed down but still remaining positive. Moreover, the reduction in death rates is largely owing to a significant fall in infant mortality rates. This is advantageous because there is a reservoir of the young waiting to enter the labour force. Correspondingly, the number of senior citizens is relatively small. For instance, they constitute just about 5 per cent of the population in contrast to around 60 per cent in the working age group of 15-65 years. Thus, India has been able to exploit the so-called 'demographic dividend' - the accelerated growth that is possible because of the favourable age composition of population.
However, there are apprehensions that without appropriate public action, the demographic dividend may soon dwindle to a trickle. Economic development is typically also accompanied by changes in the composition of output. For example, production will move from labour-intensive to skill-intensive products. An immediate corollary of this is the necessity of having an adequate skilled labour force. While we are churning out a great number of graduates from colleges and universities, increasingly doubts are being expressed about the quality of our graduates. This opens up the possibility that India may soon face a shortage of a skilled labour force. A shift in government focus from opening new educational institutions to strengthening existing ones may well be the appropriate policy response.
The author is professor of Economics, Ashoka University