Politicians and economists have been banging on about the ageing of the
population for ages, but how much do we actually know about the likely
economic consequences? Not much - until now.
We've been told
incessantly that ageing spells bad news for the budget - greatly
increased spending on pensions and healthcare - with ageing used to help
justify the harsh spending cuts proposed in this year's budget.
In
truth, it has suited the powers-that-be to exaggerate ageing's effect
on the budget. And oldies are right to resent the way ageing has been
presented as nothing but a terrible problem. If the fact that we're
living longer, healthier lives is a "problem", it's the best kind of
problem to have.
So let's ignore the budget and focus on ageing's
other economic consequences, some of which are good. We'll do so with
help from a speech given last week by Dr Christopher Kent, an assistant
governor of the Reserve Bank.
Kent says population ageing is
driven by three factors: the boom in babies in the early years after
World War II (1945 to 1960), the subsequent sharp drop in fertility
rates that created a baby-boomer bulge, plus rising longevity thanks to
decades of prosperity and advances in medical science.
The
authorities have been warning about the coming consequences of ageing
for so long - and how bad it will be by 2040 - that I suspect many
people have given up waiting for it to start.
Well, get this:
although it's got a long way to go, it's already started. The baby
boomers have been retiring since the turn of the century, thus reducing
the share of the population that's of usual working age (15 to 64).
Kent says that, taken by itself, ageing is estimated to have subtracted from the labour force participation rate by between 0.1
and 0.2 percentage points a year over the past decade and a half. This
effect has increased a little in recent years as baby boomers have begun
reaching 65.
Point is, ageing's biggest and most obvious effect is not
on the budget, it's on the labour market. Everyone alive contributes to
the demand for labour, but only those of us willing and able to work
contribute to its supply.
So ageing constitutes a reduction in the
supply of labour relative to the demand. That suggests we can expect it
to cause unemployment to be lower than otherwise (which is not to say
it won't continue to go up and down with the business cycle).
Since
Australians have worried that there aren't enough jobs to go around
ever since the middle of Gough Whitlam's reign, that sounds like good
news to me. We're in the process of switching from not enough jobs to
not enough workers.
(What I wonder is how long it will take for
our mentality to shift. The perception that there's never enough jobs is
now so deeply ingrained that any shyster with a profit-making scheme he
claims will "create jobs" is greeted as a hero and demands that he be
showered with subsidies.)
And with demand for labour stronger than
supply, this implies upward pressure on wages. Again, sounds like good
news to me. Kent adds that the converse of higher wage rates is lower
returns to capital.
Kent points out that the pressure on labour
supply will be felt most by industries that rely more heavily on labour,
mainly service industries. Prominent among those industries will be
aged care and healthcare, of course.
But, Kent adds, there's
likely to be scope for labour to be reallocated among service
industries, with a lower proportion of young people meaning we'll
require fewer workers to care for and educate children.
There'll
also be relatively less demand for workers to produce goods. That's for
several reasons. First, because older people tend to devote less of
their spending to goods and more services.
Second, because all of us
tend to spend an increasing share of our rising incomes on services.
There are limits to our consumption of food, wearing of clothes and how
many TVs, fridges and cars we can cram into our house.
Third,
because of its greater reliance on machines, the production of goods is
more amenable to continuous improvement in labour productivity than is
the production of services. As one economist famously observed, you
can't improve the productivity of a quartet by reducing the number of
players.
All this implies the prices of services are likely to rise relative to those of goods.
But
now, gentle reader, if I've trained you well enough you'll have noticed
a weakness in my argument so far. I've described only the immediate
effects of ageing - what economists call the "first-round effects".
That's
where most people's analysis stops, but economic analysis keeps going.
One of the most important questions economists ask is: "And then what
happens?" It's the second-round and subsequent effects economics is
supposed to illuminate.
Seen from an economist's mindset, what
I've described is a change in relative prices: the price of (or return
on) labour relative to the price of (or return on) capital. The prices
of services relative to the prices of goods.
Kent says it's
important that these relative price changes not be prevented from
occurring. Why? So market forces can go to work on them, adapting to
them, modifying them and, to some extent, reversing them.
The
higher relative price of labour should encourage more middle-aged people
to take jobs and more oldies to delay their full retirement, thus
reducing the upward pressure on wages a bit. The higher relative prices
of services should encourage more people to acquire the education and
training needed to work in the services sector.
And greater longevity should encourage workers to save more for their longer time in retirement.
That's what happens in market economies: things adjust.
