Demographic shifts: How to steer towards economic growth

Demographic shifts often spark concerns with fears that an ageing workforce will lead to shrinking economies and declining living standards while a rapidly increasing young population could lead to higher unemployment before a country manages to reach economic prosperity.

Investments in innovation, inclusivity, sustainability and resilience can benefit both shrinking (ageing) and growing (youthful) populations and enhance the health of humans and the planet for current and future generations.

Many countries are facing a demographic challenge with birth rates falling below the replacement level of 2.1. The global population is expected to shrink after 2064. As populations begin to dwindle when mortality surpasses births, countries must secure growth through increased workforce participation or productivity.

People will also need to be prepared for the ever faster-changing nature of work caused by technology transitions. At the same time, we should celebrate ageing and longevity as a great achievement reflecting societal welfare and an outcome of the growth we really want.

The relative size of the working population is a key determinant for economic growth. Both younger and ageing societies will need a strategy for labour participation and productivity. Younger societies will typically prioritize job creation over productivity gains and may be tempted to pursue low productivity job creation to secure higher employment rates.

Older and more affluent societies will lean more on enhancing productivity. However, they too will experience continued demand for low-productivity jobs such as in tourism and care, especially if pressures on public finances, pensions and healthcare increase.

Ageing demographics will likely face a relative decline in the workforce. Therefore, countries will need to develop timely strategies to increase both productive working hours and productivity. Increasing hours can be achieved by increasing workforce participation or migration. For younger demographies, the same levers can be used, but in the opposite direction.

However, these levers come with social challenges, especially if we opt for short-term gains at the expense of long-term negative consequences. These include:

Investing in workforce productivity is crucial, irrespective of a country’s demographic characteristics. Embracing innovation, such as digitalization and IT advancements, and ensuring a clean transition towards sustainable practices are key, as highlighted by former president of the European Central Bank Mario Draghi in his vision for EU’s competitiveness.

Effective strategies to increase productivity should be built on the four pillars of the growth we want:

As societies navigate technological progress (e.g. artificial intelligence, sensors and biotech), it is important to balance the disruptions with new opportunities for more productive jobs. Governments often struggle to keep employment policies aligned with rapid technological changes, which can lead to disruptive transitions and social unrest. To address this, policy-makers need to anticipate the impact of technological transitions on the workforce.

Policies that promote health and education, reform pensions, address prejudice and improve infrastructure will lead to a larger, more diverse and skilled workforce that fosters fairness. For ageing societies this requires future proofing pensions and social services such as healthcare.

Demand for healthcare services will increase, both for chronic disease management and long-term care. Health systems will need to become more efficient and effective and promote more years lived in good health, instead of longer lives in poor health.

Inclusivity must also encompass underrepresented groups, that are the targets of prejudice such as women, disabled individuals, and immigrants. Effective integration policies remove barriers and enhance opportunities for all, thus boosting productivity.

Additionally, investing in “lifelong appropriate learning” is needed to increase workforce resilience and create a more dynamic workforce for the future. Finally, inclusivity requires adaptation of infrastructures and housing to meet the needs of changing demographics.

The planetary health is experiencing stress levels that cannot be sustained with the current economic activities and resources consumption of society. This requires an acceleration of clean transitions that will change sectors such as agriculture, mining, manufacturing, housing and mobility.

Governments will need to assess the impact of those changes on their economy and demography and balance the need to invest in long term transitions (e.g. renewable energy) with short-term needs (affordable energy).

There will be winners and losers as nations anticipate, overcome, recover and transition to new forms of growth. A resilient society will have enough winners to create a safety net for those that were not so lucky. Therefore, it is critical to continue to invest in innovation, inclusivity and sustainability to ensure societies are fit for both immediate and future economic and demographic shocks.

How a country balances short term growth versus long term growth requires an honest conversation with their population – a new social accord – and a clear vision on the type of economy and society the country wants to be.

Governments should anticipate the consequences of demographic shifts and transitions on growth. A simple step could be to subject national growth strategies to a simple question: “how will this play out in 50 years?” In answering this question lies the roadmap for the growth we want...for an ageing society that we inevitably will become.

The authors, Jan-Willem Scheijgrond and Paul Donovan, are members of the Global Future Council on the Future of Growth