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The impact of demographic trends on competitiveness

Nowadays, companies, municipalities and states have to compete in a global market where the workforce is a key competitive factor. The competitiveness of ageing or aged societies is negatively affected by the decline of the working age population and the increase of the old-age dependency ratio as well as, closely linked to these factors, the ever-increasing healthcare and social costs and the increasingly difficult to sustain pension systems. The developed world, including the EU, is now looking for answers to these challenges.

Population control and population trends in the world

The intention to regulate population numbers has been a constant throughout human history, with great thinkers such as Plato, Aristotle and Confucius addressing the issue of population limitation as a state task. In order to prevent famines caused by overpopulation, measures that seem cruel to us were often implemented. In contrast to the overpopulation control measures of earlier periods, the Roman Empire’s interest was in encouraging population growth to secure its military and economic power. In the case of citizens, it conferred wealth and public right advantages if a man was married and had as many children as possible, while single and childless people suffered disadvantages.

In the Middle Ages, the command of Moses – “Increase and multiply, populate the earth!” – partly compensated for the high mortality caused by migration, wars and epidemics. The great thinkers of the Renaissance – Thomas More and Machiavelli – returned to the idea of limiting population growth for the balance of society. The first industrial revolution brought another change of mindset; from the mid-18th century onwards, population growth was seen as the key to an increase in national capital and economic growth. In the late 18th century, a young English theologian, Malthus, saw misery and starvation instead of the expected prosperity. He concluded that it is a mistake to assume that population growth has a clearly positive effect on a country’s economic growth, because as a population grows beyond food production, starvation and wars re-establish the equilibrium. Malthus, however, did not take into account the potential for advances in science and technology, but his theory still has a place in the developing world (Abonyiné, 2002).

The world’s population has grown exponentially until recently, exploding in the 20th century. Life expectancy at birth has also risen rapidly in recent decades due to a number of factors; not so long ago we were concerned about social and political tensions caused by overpopulation. Today, we are faced with a slowing population growth rate, but the slowdown and growth are disproportionate: births are falling dramatically in developed countries, but still rising rapidly in Africa.

Figure 1: World population by region, 1950-2100 (Source: Our World in Data)

The UN predicts that the number of people aged 65 and over worldwide will reach 1.6 billion by 2050. In Europe, the number of older people will exceed the number of people under 20 by 2030. The same will happen in Australia and New Zealand as well as in East Asia by 2050. The median age of the world’s population[1] is currently 30, but will rise to 36 by 2050. The highest median age is in Monaco, where it is over 56 years, and the youngest country is Niger in Africa, where it is less than 15 years. By 2050, three quarters of countries, or 87% of the world’s population, will be ‘old’ or ‘ageing’.

Like the overall population, the global workforce is also ageing. The number of older workers (55-64 years old) is projected to rise from 726 million in 2021 to more than 1 billion in 2050, and to 1.2 billion in 2100. In Africa, the working age population will increase dramatically in the long term, from 63 million in 2021 to 161 million in 2050 and 449 million in 2100.

While life expectancy is rising in all countries, the number of young people is also increasing in many developing countries, as a result of high fertility rates and a significant decline in infant mortality. There are 82 countries with a significant increase in the population aged 15-24. In these countries, the young working age population will increase by 151 million by 2050, and Africa will account for 73 percent of this increase (UN DESA, 2023).

Figure 2: Projected growth of 15-24 year olds between 2020-2050, by region[2] (UN)

From the end of World War II until the 1980s, the economic prosperity of the developed world was driven by an ever-growing working age population, but the European working age population has peaked and begun to decline. This process is accelerated by the fact that the baby-boomer generation is now reaching retirement age. Today, more than one fifth of the population in the European Union is aged 65 or over, and the proportion of people aged 80 and over has almost doubled over the past two decades, while the number of people under 20 is falling. Italy (24%), Portugal (24%), Bulgaria (23.5%), Finland (23.3%), Greece (23%) and Croatia (22.7%) have the highest rates of people aged 65 and over, while Luxembourg (14.9%) and Ireland (15.2%) have the lowest.

In the European Union, the median age is more than 14 years higher than the current world average of around 30 years, reaching 44.5 years in 2023. This means that half of EU residents were younger than 44.5 years, and half older. The median age is highest in Italy (48.4 years) and lowest in Cyprus (38 years). The median age in the EU has increased by an average of 2.3 years over the last 10 years, but there are some member states where the median age has increased by 4 years or more: Italy, Slovakia, Spain, Greece and Portugal. The exceptions to the general trend are Sweden and Malta, where median age has decreased rather than increased over the last decade. However, it cannot be overlooked that countries where the median age has decreased or increased only slightly have a high number of newborns born in the given country to immigrant mothers from non-EU countries. The declining birth rate and the growing number of people aged 65 and over also puts an increasing burden on the working age population: the old-age dependency ratio in the EU in 2023 was 33.4 per cent, meaning that for every person aged 65 and over, there were fewer than three people of working age (15-64 years). The trend is projected to increase, with less than two people of working age for every older person in 2050 (Eurostat).

The situation in Hungary

Hungary is no exception to the trends in the developed world; the challenges of a declining birth rate and an ageing society are becoming increasingly evident here too. The two population pyramids below illustrate how the proportion of age groups in the total population has changed since 1900.

Figure 3: Population of Hungary by sex and age on 1 January 1900 (KSH)

Figure 4: Population of Hungary by sex and age on 1 January 2024 (KSH)

The family policy measures of the last 10 years have eased the demographic pressure; according to KSH (Hungarian Central Statistical Office), if the total fertility rate had not moved from the 2011 level (1.23) to a positive direction, 178,000 fewer children would have been born between 1 January 2011 and 1 January 2023. Hungary ranks in the middle of the EU in terms of both the proportion of people aged 65 and over and median age. The proportion of people aged 65 and over is below the EU average at 20.5%, and the median age is 44.2 years. Hungary is one of the countries with below average dependency ratios in the EU, but as the proportion of older people increases, so does this ratio. It will rise from 31.9 per cent in 2023 to 45.5 per cent in 2050, meaning that while in 2023 there was one elderly dependant per 3.1 working age persons, in 2050 the ratio will be 2.1 (KSH and Eurostat).

The links between demography and competitiveness

Competitiveness is an economic concept that makes it possible to compare the ability of companies or national economies to produce goods and services that are in demand on the international market. Competitiveness also expresses the ability of a company or a national economy to change and adapt, to make optimal use of its resources, and to increase social welfare in a sustainable way (Chikán-Czakó-Demeter, 2019).

The World Economic Forum and the Swiss business school IMD’s World Competitiveness Center are organisations that regularly publish the competitiveness rankings of countries each year. These organisations work with partly different methodologies. The World Economic Forum’s key areas are the enabling environment (institutions, infrastructure, ICT adoption, macroeconomic stability), human capital (healthcare, skills and capabilities), markets (goods market, labour market, financial system, market size) and innovation factors.

The key areas of IMD are economic performance (GDP, international trade and investment, prices), government efficiency (public finances, tax policy, institutional frameworks, economic regulation, social structure), management efficiency (productivity, labour market, financing, management), infrastructure (basic, technological and scientific infrastructure, health and environment, education).

For both organisations, a key area of competitiveness is the labour market situation. Demographic challenges have become economic and competitiveness challenges in both advanced and emerging market economies, and a young and skilled workforce has become a key economic issue in ageing societies. More and more advertisements are appearing on the internet where countries and cities, not companies, are trying to attract young and skilled workers.

 

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Trends suggest that the fertility rate will not rise in advanced economies, but life expectancy will increase. Retirees are living longer, but the number of children being born will not be enough to compensate for the number of older people. Dependency ratios will also deteriorate significantly in developing economies, particularly in North Asia and Eastern Europe (Goodhart-Pradhan, 2023).

In its July 2018 report, the UK’s Office of Budget Responsibility wrote: “Demographic change is one of the most important pressures on public finances” (Goodhart-Pradhan, 2023). Demographic trends are indeed putting increasing pressure on public policy, fiscal and monetary policy, and the labour market.

A larger working age population contributes to increasing labour market participation, which is a driver of economic growth and productivity. Individuals in this group tend to accumulate a higher proportion of savings, which facilitates further investment-led growth and development. A young and dynamic population brings fresh ideas and energy to the economy, fostering innovation and entrepreneurship. In addition, the working age population is a driver of consumer demand, stimulating domestic production and creating new jobs. A higher proportion of working age people relative to dependants can also alleviate the financial burden on social services and government support systems. There is a chance that a larger and educated working age population will accelerate economic growth, improve living standards and enhance global competitiveness. The decline in the working age population may be associated with increased health care costs typical of ageing societies, unsustainable pension liabilities and the impact of changing demand factors on the economy.

Of course, the relative size of the working and non-working population is not in itself telling, and the macroeconomic relationship between the ageing of society and economic growth is complex. Indeed, other factors, such as education, technology and the institutional system, have a stronger impact on labour productivity than the increase in the age of the workforce. There is also a positive effect of an ageing workforce, with older workers having accumulated knowledge and experience that can contribute to productivity growth.

The overall impact of ageing on economic growth and productivity also depends to a large extent on the response of firms. Digitalisation and automation increase productivity and can to some extent replace the living workforce, but this depends on the ability of firms to finance the necessary investments and the availability of a skilled workforce that is able to handle new technologies (UN DESA, 2023).

Solution options

Ageing societies try to counteract negative demographic trends, basically by one or a combination of the following three options:

  1. Automation and digitalisation to replace the live workforce.
  2. Raising retirement ages and increasing the activity rate among the retired.
  3. Increasing foreign labour, draining young and skilled workers from developing countries (Goodhart-Pradhan, 2023).

However, alone or in combination, the above options cannot provide a solution without addressing the underlying problem. The underlying problem is the decline in fertility, which is leading to an ageing population and a falling proportion of working age population.

Against this background, all three of the above options have their limitations. This is confirmed by international examples, which provide valuable lessons for policymakers. One of these examples is Japan, where demographic pressures emerged earlier than in other developed countries. Developed European countries are potentially less than two decades away from reaching the demographic trajectory that Japan is now at. Policymakers need to understand what is happening there to see the risks of not taking timely action to address the demographic challenges (Tatár, 2023).

  1. Automation and artificial intelligence complement, but do not completely replace the human workforce. Automation can replace live labour in industrial production, but the labour freed up there is increasingly needed in elderly care, where live labour cannot be replaced by robotisation. Japan has developed humanoid robots for elderly care, but the use of robots has increased the workload of elderly care workers rather than reduced it, and has not solved the labour shortage.
  2. The activity rate of people over 65 can only be increased up to a certain level. The participation rate of older workers is rising, but as life expectancy increases, there are more and more very old people who need care. Their growing numbers are putting increasing pressure on social and health care systems, and the dwindling number of contributors and increasing number of beneficiaries is making pension systems unsustainable in their current form. To increase the activity rate of older people, billions of dollars need to be invested in improving health care, following the example of Japan, and legal and cultural barriers to working in old age need to be removed. In these areas, Japan has made undeniable progress, but the negative trend in fertility has not been reversed (falling below 1.25 in 2023) and the pressure on an aged society has not been eased.
  3. Current migration trends are not sustainable either. Rapidly ageing societies in developed countries are in dire need of labour, with the brain drain from economic centres moving millions of people. The EU member states are also involved in this process, with the countries of Central and Eastern Europe struggling to retain or lure back their own professionals and young people. However, a significant proportion of immigrants from outside the EU come from Muslim cultures, their integration is becoming an increasing burden for the host countries, and integration failures are leading to increasingly serious socio-political tensions, while labour shortages are not easing.

In June 2023, the European Council requested the European Commission to develop a proposal to address demographic challenges, in particular their impact on competitiveness. The proposal was adopted by the European Commission in October 2023. It is based on four pillars:

  1. The first pillar includes solutions to make it easier for families wanting children to balance family life and work, and to make a quality childcare system more accessible.
  2. The second pillar focuses primarily on the labour market situation of young people and improving their life chances by aiming to help them develop skills and become home owners.
  3. The third pillar includes measures to preserve the welfare level of older people.
  4. The fourth pillar, while stating that young talent should be mobilised primarily within the European Union to alleviate labour shortages, allows member states to consider allowing legal immigration to alleviate labour shortages in the short term. The Commission’s wording is extremely cautious, as it faces the fact that while almost half of EU citizens consider ageing and labour shortages to be the biggest problems for European competitiveness, societies’ resistance to illegal immigration is growing as a result of the intense migratory pressures of recent times (European Commission, 2023).

Work on the demographic toolkit is expected to continue during the Hungarian EU Presidency. This would fit well into the programme of the Hungarian EU Presidency, which could include addressing demographic issues at EU level as one of its priorities, and shedding light on the links between demography and competitiveness.

 

[1] The median of a population’s age is the age at which exactly half of the population is older and exactly half younger.

[2] Oceania excludes Australia and New Zealand, while the category of developed countries includes North America, Western European countries, Israel, Japan, South Korea, Australia and New Zealand.

Vezető kutató at Oeconomus Gazdaságkutató Alapítvány | Published writings

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