Aging problem or is the retirement age a sentence for productivity growth?

Harder, better, faster, stronger, … younger? We all are used to think that young people are the integral component of productivity and this should be taken as an axiom. According to the newest data, many countries nowadays suffer from the shortage of labor. Why do the workforces shrink? Is it affected by the development of smart machines and automation, or maybe by tax policies? Can the order generation make a positive contribution to the productivity of the country? In this article, we are going to give answers to these questions and to sort out how is productivity affected by young or old people.

What is the problem?

The core of the problem is the decline of labor in advanced economies. Why is it happening? The answer is quite simple – aging populations. Thus, according to the labor pools data of differences in the six developed markets such as Japan, Germany, Italy, Sweden, the United States, and the United Kingdom we have the following results:

  • Japan. Lots of people all over the globe are used to think that this country is one of the world technologies leader and the forerunner of all the changes happening in the West. To date, this country suffers from two problems at once – shrinking of the future generations number and the lack of the labor force. However, the latter issue can also be greatly influenced by the record low number of working immigrants. If compare, for example, with Australia (28%) or Sweden (17%), Japan has only 1.6% of working migrants.
  • Germany. If we compare with Japan, it has a higher number of immigrants in the workforce, but in this case, another problem occurs – the age of workers. The age of exit the German labor market is up to 63 years, while in Japan this index can reach the 69 years position and even exceed it. Thus, one of the possible way outs of this situation is the delay of the retirement for the older workers in Germany.
  • Italy. Italy can “boast” one of the lowest participation rates if compare it with such countries as Sweden and the United Kingdom. It is mainly due to the delayed entry of the labor market by the young people. In the upper mentioned countries this problem is solved by the number of young working migrants.
  • The United States. Among all the countries reviewed in this paragraph, the US has the best composition of the labor pool which is mainly caused by the sizeable number of the working migrants. However, in the US as well as in Germany, the age of exit the labor market started decreasing since 2009. It has reached the position of 62.8 years in 2016 that is lower comparably with the 66.2 years in the 2001-2007 period.

Elixir of Giant Growth

Possible ways to solve the problem of the labor shortage

So, we have a problem, and now it’s time to this through the possible ways to overcome it. Until the indexes of the labor shortage become crucial, there are several ways to improve the situation.

  1. Prolong the retirement age. It can be made either directly or by providing various benefits encouraging people to remain in the workforce for the more extended period.
  2. Encourage immigration. It is quite a controversial issue, but according to the statistics data we have from other countries, this can become a good solution for the aging problem. Involving the educated, talent, tax-paying people who as a rule are younger than the native population can become a reasonable decision, especially if taking into account the minimal upfront investment needed.
  3. Stimulate the higher fertility rates. Providing young parents with various benefits and significantly improving childcare facilities, this route to cope with the aging and labor shortage problem has the right to exist. However, this way is not the best one as it takes a long time before the country gets benefits from the higher birth rates.

Is automation the best way out?

We live in the era of the automation technologies heyday. Robotics, artificial intelligence, and specially developed software become better and smarter each day. Can these technologies replace the human labor shortage? Yes. Due to the statistical data, collaborative robot (or “cobot”) to date can replace 1.6 workers by performing comparably simple tasks and working alongside humans. This number is expected to be increased to 2 workers till 2019-2020.

Due to the continual development and improvement of machine learning, nowadays machines can perform not only simple mechanical and predictable tasks but more variable and difficult ones. Whether it is a simple work in the warehouse or reading and analyzing medical scans, today machines can perform lots of tasks regardless of low or high skills are required.

Although, there are still several tasks that require presence the part of “human factor.” For example, among them are creativity needed for advertising, sympathy for nurses, and intuition for chefs, judges or hairstylists. Of course, even the smartest machines will not be able to replace humans entirely, but they definitely can change the labor shortage problem for the significantly better results.

Older population- acceleration or deceleration of the growth?

Now it’s time for the most critical and actual question nowadays – can the old population drive forward and make a noticeable positive contribution to the economics of the country? Taking into account that the older generation spends less than younger, the answer is quite clear – it’s unlikely. Although there are some peculiarities in this issue that makes the statement not so simple. The statistic shows that older people spend up to 25% less if compared with the middle-aged people. The composition of spendings has also changed, for example, such industries as entertainment and leisure nowadays are suffering from the severe decline because their consumers grow old. However, the other side of the coin is that such industries as medical equipment vice versa feels the growth of their markets. As well as the medical equipment, the healthcare industry is also continually improving because of the aging demographics. Nursing robots, autonomous cars, and lots of electronics are continually innovating with the one goal in common – make the life of the older people easier.

Thus, despite the fact that from the first view old generation and growth in economics seem unrelated concepts, they still can drive innovation and growth in specific industries provoking development and improvement.

Employment rate by sex

Retirement. Maybe tomorrow?

In our article, we have been talking about the two urgent problems – aging and labor shortage. But! There is another crucial moment that should be considered – retirement. Humanity suffers from the aging problem, but still many people can’t afford retirement. How is this possible? For today, the retirement age in the United States is sixty-four years. Taking into account statistical data, we will see that this number is going up, people decide to work longer. So, the real issue is that people can’t afford to retire.

The main reason for such a problem is not enough savings together with comparably low pension benefits. Let’s consider some numbers to create a picture of the situation we have to date. Nowadays, the average pension in the US is equal to $23 000. At the same time, the disposable income is minimum $44 000 per year. So, what do people want? The ideal picture of their retirement is quite predictable – the disposable income should be equal to the pension benefits. But we all know that nothing is perfect in our world and this also applies to pensions. What do we have as a result? Even adding the contribution from savings, the average American has about $30 000 instead of the necessary $44 000. The decision of people is quite reasonable – they want to “postpone” the retirement and work longer to save more money for the times when they can no longer work and earn.

Wage Growth Tracker

It is not only a problem of current interest but a road with no end. People don’t know how long they will live for and afraid that it will not be enough money for the retire. Such non-acquaintance how long will be their life make people work longer and longer. What do we have? 65-year-old workers who have decided to stay in the labor force for longer competing with millennials. From the one hand there is nothing bad in it, especially in the epoch of the labor shortage, but from the other hand, they will hardly be able to make a significant contribution into the economics and development of the country, into new technologies creation or world breakthrough due to new ideas.

“All in good time.” There is time for work, and there is time for relax. The retirement shouldn’t be a privilege or a “luxury” even in the epoch of the labor shortage. We have already mentioned that the older generation can drive innovation and progress, but they rather should be a reason for this growth and development than work to the detriment of their normal comfortable retirement life.

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Alexej Pikovsky

Passionate about investing in private and public companies and a successful track record across different industries and geographies. German Academic Foundation Scholar and Research Affiliate at the Centre for Global Finance and Technology at Imperial College London. Addicted to reading and sharing industry deep dives. Enjoy!