An ageing world could boost your pay but knock growth

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The divide between rich and poor has widened across the globe since the 1960s. But shifting demographics could start to redress some of the balance towards ordinary workers.

Stephen Blackman, RBS Group Economist
A 30-year explosion in the world’s population of working age people kept a lid on pay growth but began slowing in the 2000s before swinging into reverse in the last couple of years. The diminishing supply of workers may now provide some stickiness in real wages after years of stagnation.

That is welcome given that income inequalities are at their widest level in half a century. A 2011 report from the OECD shows the richest 10 per cent of citizens in the 22-nation club earn nine times more than the poorest 10 per cent, versus seven times in the mid-1980s. And it is not just in low-paid jobs where real wages have stagnated. Many semi-skilled positions in manufacturing and administration have disappeared. These used to be middle-income roles supporting middle-income families.

The revolution in robotics and ICT will continue to reshape the labour market, but wages will no longer be subdued by a double whammy of technological change and workforce expansion. Societies are greying and the proportion of workers in the wider population is shrinking around the world. The median age in advanced economies has risen from 32 in 1980 to around 40 today. It will increase to 46 by 2050. In China the typical man or woman will be 48 by 2050, 13 years older than today’s ‘Mr Average’. Contrast that with the three decades to 2010 when the working age population of East Asia rose more than 50 per cent; a period when women also streamed into the jobs market in unprecedented numbers, figures from the UN and International Labour Organisation show.

This looser brake on wages may hearten workers, but will not be welcome news for the economy given the contribution expanding employment made to global growth in the 1990s and 2000s.

The Japanese and German economies will be worst hit among major developed nations. Their working age populations will actually shrink by more than 30 per cent between now and 2050 according to UN population projections.

Worker numbers in the US, UK and Australia will not fall in absolute terms based on current immigration levels and birth rates, but they will constitute a smaller slice of the population and thus workers will shoulder a greater burden of baby-boomers’ pension and healthcare costs. The proportionately smaller tax base and greater commitments pose serious questions about the long-term viability of welfare programmes such as Medicare in the US.

The only solution to this conundrum is to raise productivity. More of us will have to work, we will have to work smarter and, yes, harder too. This might theoretically ‘solve’ the problem but politically and socially it will pose enormous challenges for governments.

First, migration will not offer a magic bullet. The labour gap in many developed countries is so great that relying on bringing in foreign workers is both politically and socially unfeasible. Extrapolating EU data, we calculate for example that Germany and the UK would need an 20 million new migrants, Spain and Italy 18 million and France 16 million to maintain the proportion of those of working age at 2010 levels.

Second, encouraging more women into the workforce will only help at the margins, given already-high female participation in much of the developed world. Even in rapidly ageing East Asia, female work rates are above the global average.

The most important tool in plugging the labour gap will be raising the retirement age – increasing it by an average seven years in developed economies according to the IMF. Despite a lack of action across much of the developed world (the UK for example has only increased the typical retirement age by one year in the last decade) it has been done elsewhere. Japanese, Koreans and Mexicans typically retire 10 years later than their French or Italian peers.

Investors, as well as governments, must prepare. As the Bank for International Settlements points out, a world with a large and growing middle age cohort has boosted savings rates and the demand for assets favoured by savours as well as housing. In the US, up to two thirds of the movement in PE ratios on the S&P500 can be attributed to baby-boomers shifting investments out of stocks and into bonds to as they prepare to draw their pension, according to a study by the Federal Reserve Bank of San Francisco.

Commercial banks will also need to adapt, taking an inter-generational view of their balance sheets. The demand for mortgages and loans, plus the flow of regular wage deposits will weaken in step with the fall in workers. Simultaneously, customer deposits will be drawn down more quickly as more pensioners withdraw their savings.

It is society however that faces the toughest readjustment. The new demographic settlement will demand more from workers, impose higher taxes and strain public services. Finding an equitable solution that avoids heaping disproportionate pain on either workers or those they support will become one of the big policy challenges of the next decade for governments around the world.


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