Diminishing working-age population poses global risk

The earth’s population is on course to reach 9.3 billion by 2050, according to the World Economic Forum, a growth rate that is bound to present governments and businesses with serious challenges.

Currently, about 7.2 billion people live on the planet, but the proportion of non-working-age population is increasing, owing to significantly longer life expectancies in much of the developed world.

This presents a major risk to businesses and governments as a proportionally smaller workforce must support a growing non-
working population amid an increasingly sensitive global economy.

Maplecroft’s Working Age Population Trends Index (WAPTI) shows the highest risk countries – those with slow-growing or possibly shrinking working-age populations – are found predominantly in the developed world. 

European countries, particularly at the eastern edge of the continent, account for 19 of the 20 highest-risk countries in the index. Bulgaria, Moldova, Georgia, Latvia and Ukraine
constitute the top five. 

Europe’s largest economy, Germany, is expected to experience a 0.63% contraction of its working-age population each year until 2025. Consequently, some analysts have forecast that Germany will surrender its position by mid-century to the UK, where the working-age population is continuing to grow, albeit it slowly, by 0.24% per year over the same period. 

This divergence is largely driven by immigration into the UK, particularly since the accession of eight Eastern European states into the EU in 2004 and with an increase in the birth rates supported by migrant families.

Japan is the sole non-European country in the 20 highest risk countries, where 25.6% of the population is forecast to be over 65 by 2030, increasing to 38% by 2055. This dramatic demographic shift means the total population of Japan is forecast to shrink by almost a quarter, from 128 million to 95 million in the half-century to 2050, leaving Japan’s substantial debt burden to be shouldered by a smaller population. 

China’s turning point

China’s demography has played a very significant role in its economic development, with a seemingly inexhaustible labour supply helping to restrain unit-labour costs. This has driven rapid economic growth based on cost-competitive exports and high levels of investment. 

However, China is an ‘extreme’ risk country in Maplecroft’s WAPTI because the enforcement of its one-child policy means that the demographic dividend has passed relatively quickly. In fact, recent International Monetary Fund research indicates that the country could reach the Lewis Turning Point − the moment at which it becomes a labour-shortage economy – between 2020 and 2025.

Reaching this point will have important ramifications for the Chinese and global economies, according to Maplecroft, signalling a definitive moment in its transition from production-led growth, with its associated wage repression, to one in which labour holds greater bargaining power and the wage share of the economy can be expected to rise from today’s depressed levels, boosting household consumption.

Crude birth rate figures, the dominant factor in determining population growth together with the age structure of the population, is calculated by the annual number of births per 1,000 people at midyear. A nation’s natural population growth – excluding immigration – can be calculated by subtracting its crude death rate from its crude birth rate.

Using this method with the latest World Bank data reaffirms Maplecroft’s analysis. Germany’s natural population is decreasing at a rate of -3 per 1,000 people and Japan follows closely at -2. At the other end of the spectrum, Mexico’s population is growing at a rate of +14 people per 1,000 each year, with India, Indonesia and Malaysia on +13 and Turkey on +11.

Age and risk

For businesses and governments alike, the distribution of ages among the population determines the level of risk. For example, in Japan, the working-age population is 62%, according to the World Bank, which is at the lower end of average. However, its non-working-age population is predominantly made up of citizens aged 65 and over, with this section accounting for 25% of the total population. That leaves Japan’s 0-14 age group making up a mere 13% of its entire population and raises significant worries regarding the country’s future workforce.

Nations with young populations such as Mexico, India, Indonesia and Turkey will have to invest greater amounts of capital in education and nations with older populations need to invest heavily in the health and social care sector.

Key socioeconomic issues can arise from such imbalances, and history suggests this tends to lead to civil unrest unless significant adjustments are made, such as raising taxes or reducing spending. 

One such adjustment has been implemented in the UK and Germany, where government initiatives have increased the state pension age to encourage people to work for longer as a way to alleviate pressure on public finances.

Businesses must be aware of the demographic landscape in regions where they operate. An unfavourable ratio of non-working-age citizens could destabilise strong economies as the available workforce shrinks while the Earth’s population continues to expand.