population and economic change (summarize notes)

Effect of Population’s Age Structure on the Economy

Earlier in the course we learned that economically growing nations pass through a Demographic Transition whereby their age structure changes from a youth-heavy distribution to an age-heavy distribution. In between is a period of time when total dependency is at an historic low and a “Demographic Dividend” may be earned.

To analyze the consequences for the economy it is helpful to look at two key points:

a) is the capital:labour ratio changing?

and

b) is dependency changing?

You may recall from the Solow model that capital shallowing is a problem when population is growing. Capital shallowing means that capital per worker is falling. If capital accumulation does not keep pace with population growth, shallowing occurs and labour productivity falls.

When child dependency or age dependency is high, savings are likely to be low. Families and governments must spend on child and elder care. If there are many elderly, they may be liquidating their savings to support their lifestyle.

In the time of demographic dividend, however, savings can be higher. Since savings build up capital, labour productivity can be expected to rise.

In class we shall fill in the following table:

	Y/L Output Per Worker / Labour Productivity	L/N Fraction of Pop that Works	Y/N = Y/L * L/N
Young population
Demographic Dividend
Older population

Young Populations and the Demographic Dividend

Young populations may be that way due to high fertility, high mortality, immigration of young people, or emigration of older people. Usually, young populations are growing populations.

Populations where the share of young is growing experience:

· Higher child dependency

· A growing workforce

· Redistribution of earnings from labour to capital: lower wages, higher prices for housing and other capital goods

· high interest rates due to low supply of savings

· Changing sectoral composition towards goods and services demanded by younger people.

When fertility begins to fall, and aged dependency is still low, a working age cohort will emerge which as few dependents. In that case, a demographic dividend can be earned.

The way the demographic dividend delivers benefits to a nation is that the new cohort of young workers

- is larger compared to previous and subsequent cohorts due to the boom that took place, followed by lower fertility rates

- is larger due to the lower fertility rates, meaning that women are more likely to enter workforce

- is more likely to save because of smaller family size/fewer children

- is more likely to save because of lower aged dependency i.e. fewer parents per worker.

- is willing to adopt new technologies and new ways of doing things due to their youthful attitudes, recent education, and long work horizon

Policies that support the demographic dividend are policies that promote the utilization of this new, large labor force, and policies which keep dependency low so that the labor force can save a large part of its earnings. To successfully absorb a larger labor force, a society must make it easy for businesses to become established, get loans, and hire/fire workers. The labour force should also be healthy and well-educated. Policies that promote the health of dependants, provide flexibility for workers to look after their dependants, and make family planning easier will help reduce dependency.

These policies are also required, and are even more important, before the demographic dividend occurs. When population growth is strong, and there are a large number of child dependents, it is important that business growth is facilitated and loans are available to provide employment and combat capital shallowing.

According to Lee (2003), economically developed nations' dependency ratios have been falling from the mid 60s, and are now set to sneak back up due to aging. Hence our opportunity to collect a demographic dividend is over for the time being. Even the experience we had of our boomers being working age might not have been as large a dividend as we first experienced in Canada a hundred years ago. At that time, elderly survival was lower, and so when fertility fell, during the 20s and 30s for example, there were also fewer aged to care for. Our boomers had relatively few children, but they also had parents to support.

Less developed nations entered their demographic dividend phase around 1970, and it may last until 2020. The least developed nations are also in the dividend phase, having begun later, about 1980.

For the demographic dividend to yield its full benefit, the youth cohort must be healthy and literate and have access to jobs. Jobs may be scarce until the capital stock catches up with the ballooning workforce. Capital shallowing is a problem as the labour force grows, which threatens productivity; on the other hand, the working cohort has more money to save because families are smaller. During the demographic dividend, wages will be competed down by the surge in the number of workers, but wages may also grow if productivity grows. In the meantime, a housing and university boom can be expected, as will be the case whenever populations are becoming younger. Housing and school placements will be in short supply.

With so much competition, young workers face more economic stress. If their expectations are not realized, they may become frustrated. There are more potential recruits for the army, and there are also more young people ripe for radical politics and tempted to act out their frustration.

A recent New York Times article on Middle Eastern youth reported that, because economic opportunities have not grown in pace with population, young adults are having to postpone marriage. Unemployment for those aged 15-29, for example,was 27% in Egypt in 2008, compared to 11% for Canadians 15-24 years old. “I can’t get a job, I have no money, I can’t get married, what can I say?” Mr. Sayyid (Cairo) said one day after becoming so overwhelmed that he refused to go to work, or to go home, and spent the day hiding at a friend’s apartment.” Sayyid’s engagement was called off when he could not pull together $21,530 for his wedding, which budget included $350 for the ceremony, $2100 for the bridal gift, $100 for rings, $,3500 for appliances, $2,500 for furniture, and $12,280 for an apartment. Some governments, like Saudi Arabia and Egypt, offer marriage subsidies to qualifying young couples.

To empower youth to take their place in society and in the workforce, the provision of loans and subsidized education will be important. Creating a positive business environment, where new firms can receive loans and where they are free from too much regulation, fees, and taxes, will assist job creation.

If their talents can be used and their voices heard, young people can bring new energy and ideas to the work force and to public life. They usually have a greater degree of idealism and energy than older citizens. They also more readily adapt to new technologies.

Benefits of an Aging Population

Write Bloom et al. (2003), "An aging population is, fundamentally, a mark of development success." Inasmuch as aging is due to falling mortality, we can all agree that aging is good. Not only are we as individuals likely to live longer, but those we care about, especially our parents and grandparents, are likely to remain with us longer.

A society's elders often help hold families together: they provide love, care, advice, financial support, and a sense of one's place in history. Elders' role as keepers of tradition, masters of craft, and witnesses of history is vital to learning and good government, especially in cultures without writing. Research by Rachel Caspari regarding prehistoric human communities indicates that only the most recent human societies had a high aged dependency ratio, and she speculates that there was a positive feedback loop between the standard of living and the survival of elderly.

Canada is Aging

As seen in a previous lecture, the aged dependency ratio in Canada is rising. Canada’s population structure is aging due to falling mortality and a pervious decrease in fertility.

Life expectancy at birth in Canada has trended upward without interruption since at least 1920. Between 1920 and 1922, life expectancy at birth was 59 for Canadian men : today it is 78.8 . It was 61 years for Canadian women; today it is 84.1 years.

Meanwhile, our TFR and CFR (completed fertility rate) fell steeply between 1960 and 1990, though their decline seems to have ended. Cohorts born during the 70s and 80s were smaller in size than cohorts born in the 40s and 50s.

If present trends continue, Canada in 2017 will look a lot like today’s Kelowna (BC), Victoria (BC), or downtown Kingston (ON), except that it will be more ethnically diverse.

The aged dependency ratio is increasing in much of the world, including Central and Eastern Europe (from Germany to Russia), Japan and South Korea, and the Northern Mediterranean (Italy, Serbia, Greece, Romania). Often, double aging is occurring: the proportion of elderly is increasing, and the average age of the elderly is increasing.

We could also speak of triple aging: not only are the populations of old increasing and getting older on average, but people are retiring from the workforce earlier. In 1910, about half of men aged 74 still worked. In 2000, half of men have finished working at age 63. (Lee, 2003).

Populations where the share of elderly is growing experience:

· Higher aged dependency

· A workforce which is growing less rapidly or shrinking

· Redistribution of earnings from capital to capital: higher wages, lower prices for housing and other capital goods

· high interest rates due to lower supply of savings

· Changing sectoral composition towards goods and services demanded by older people

Types of Pensions

Governments and businesses often offer pensions to workers. Pensions are payments of money which arrive every month or year once a worker is retired. Where do governments and businesses get the money for the pensions? There are two ways.

First, the money for the pensions may come out of current tax revenues (in the case of the government) or current sales revenues (in the case of business). We call this a pay-as-you-go pension. From its beginning in 1964, to 1998, the Canada Pension plan was a pay-as-you-go plan, taking money from workers’ paycheques to give to retired Canadians.

A pay-as-you-go plan works well as long as revenues are increasing every year. When the population is growing and each newborn cohort is larger than the previous, the work force is growing every year and does not have to be taxed very much to provide for the smaller cohort of retirees.

In 1998 the Canadian government realized that the ratio of retirees to workers was growing. Workers would have to be taxed more and more to provide the promised pensions. So Canada began to convert to a fully-funded pension plan. In a fully-funded plan, the workers are taxed and their money is set aside in a fund to earn interest and provide for their own pensions in the future. The success of this plan depends on the interest rate being high enough. In fact, it can be shown that, if the interest rate is higher than the rate of natural increase, the fully-funded plan requires less taxation of earnings than the pay-as-you-go plan, and vice versa.

You cannot switch from a pay-as-you-go plan to a fully-funded plan overnight. The Canadian government increased the amount of money collected from workers, using some of it to pay for retirees’ pensions, and using the rest of it to build a pension fund.

Recall that a shrinking population makes a pay-as-you-go pension plan increasingly expensive. One reason that the US, Canada, and western Europe have been criticized for doing so little saving prior to the current financial crisis is that the West needs some savings in place for pensions and eldercare. We are used to a growing population, where a set tax rate will produce growing revenues every year, just because of population growth. Without strong population growth, we cannot "grow our way out of deficits."

A note on immigration of working-age people

Can immigration of working-age people be used to increase the employment ratio? Canada's Ministry of Finance has estimated that, just having Canada's labour force continue to grow at 1.4% through to 2050 would require immigration to more than quadruple, to almost 900,000 immigrants per year. It would be difficult to support and integrate this many people. Whether the government decides to increase immigration or not, it should design programs to ease transition of immigrants into the workforce and recognize their existing professional certifications.

Aging and health care expenses

We think of the elderly as requiring a great deal of medical intervention. However, many elderly are healthy until their last 6 months of life. And many elderly do not receive costly or aggressive treatment. Morgan and Cunningham (2011) showed that in BC, which has a similar age structure to that of Canada as a whole, inflation-adjusted hospital care, medical care, and prescription drug spending per person grew between 1996 and 2006, but only 1% of this change was attributable to population aging. Most of the increase could be explained by the increased use of specialists and the increased use of diagnostic tests. They also found that improved survival/reduced mortality acted to reduce health care spending.

Other economically-relevant changes in population composition

Besides age composition, two other economically significant aspects of population composition are cultural diversity and family diversity.

Family structures

Not only does family structure affect the economy, family structure is also affected by the economy.

Cultural diversity

Cultural diversity has consequences for the economy. On the one hand, cultural diversity means interesting differences among people from which we can learn and with which we can specialize and become more productive. We discussed the productivity effects of specialization in our discussion of population size. The larger the population, the greater the diversity in talents and interests, ceteris paribus.

On the other hand, cultural diversity may give rise to stresses and strains within the population as misunderstandings or conflicts arise. It may be more difficult to achieve social cohesion. The economy depends on trust and cooperation and a peaceful climate in which to go about one’s business, all of which will be hurt if there is social strife.

The quickest way to change the cultural mix of a population is by migration, with new people coming in and others leaving the country. Migration affects the economy via cultural diversity. Migration itself is usually a consequence of economic pressures.

Changes in Population Composition: Family Structure

The composition of a population in terms of family structure, whether in terms of the proportion of married people in society, or the number of households headed by one parent, or the number of related or non-related people living under one roof, is of interest to demographers and economists. But where does it fit in to economic demography? It fits right at the heart of the micro-economic responses to demography and the micro-demographic responses to the economy. The family is the tiniest population of interest, the tiniest economy. Family structure influences and responds to fertility, mortality, and migration. It influences and responds to economic pressures. An integral part of our culture, family structure is the matrix in which economic and demographic pressures play out.

Family structure is affected by many things, including the three population processes (fertility, mortality, and migration), social norms, the sex-ratio, and economic pressures. In turn, family structure affects the economy through demand for housing and other goods and services, through the dependency ratio, through labour participation rates, and through demand for government social welfare programs.

Figure 42-1. Economics, Demography, and the Family

Fertility Population composition

Mortality Population size

Migration Population rate of growth

Economic pressures

(i.e. prices, wages, incomes)

arising from demand and supply

of various resources including skills and time.

Changes in Family Structure

Over the last 50 years we in the West have seen an increasing tolerance of and incidence of unconventional family structures. Although the number of grandparent-inclusive families is lower, the number of single parent families, step-parent families, blended families , cohabiting adults, and openly homosexual unions has risen.

The greater social tolerance can be attributed to secularization as well as to greater pluralism, education, communication, political freedom to agitate for change, and the willingness of activists to struggle. There has also been an economic connection: a rising standard of living makes people less dependent on family members' support and opinion, and a strong social safety net gives them the courage to try unconventional things.

The economy can affect family structure more directly. A poor economy may force men or women to migrate in search of work, which may break up families or prevent people from getting together. The cost of living may give couples the incentive to stay together during low moments in their relationship, but poverty can also be a strain that drives people apart

As families form or break apart, there may be economic consequences as well as emotional ones. Some innovative family structures provide a strong framework for health and prosperity. Others are weaker and may place family members at greater economic risk. When family structure works well, love, skills and ideas are shared, as well as expenses, care of dependants, and risks.

We now examine changes in family structure that have occurred in the West and which are occurring globally, due mostly to secularization.

Changing role of women

More women work outside the home. This is due to the trends discussed above, particularly feminism. However, economic realities have also played a role. The real wage has stagnated since the 1970s. For those households aspiring to a growing standard of living, it may be necessary for the wife to work.

We have already discussed how an increase in education and in the variety of opportunities available to women tends to decrease fertility. Generally, higher education, and work outside the home, are correlated with fewer children in the family. Women's work affects not only fertility but also, of course, the economy directly. Women working outside the home have greatly expanded the labour force, initially reducing the wage of men in similar occupations. If time worked in the marketplace is more materially productive than time worked at home or in volunteer positions, there is a net material benefit to society. Can we assume that this is the case? Perhaps yes, because women now have the ability to specialize in what they are best at.

Regardless of the material benefit, women appreciate having more choices in life. However, if they are still expected to assume traditional responsibilities while working outside the home, their lives may become more stressful. More and more, men are sharing in childcare and housekeeping, but in 2005 for example, Canadian men aged 25-54 spent 1.1 hours per day on unpaid work, while women the same age spent 1.9 hours.

Gary Becker (A Treatise on the Family, 1981) theorized that the material benefits of specialization (wife to childcare, husband to marketplace) helped keep couples together. The blurring of the expected duties of each partner may stress the relationship. Expectations may have to change and traditions be adapted for the traditional marriage to thrive.

Increased Couple Similarity

With the expanded role of women has come the possibility that women have similar educational levels and similar experiences as their male partners. This has been facilitated also by rising sex ratios. Romantic love and compatibility have become the top criteria for marriage. Couples are taking longer to get to know one another. Goldin and Katz (2002) believe that the contraceptive pill has made longer courtships less costly (in terms of intimacy foregone) and contributed to increased compatibility of married couples. They demonstrate a statistical relationship between access to the pill and higher age at first marriage, lower divorce, and lower marriage rates. They also demonstrate similar, but weaker, effects from the legalization of abortion.

On the other hand, because of the pill, women unwilling to use the pill or have an abortion are facing increased pressure for sex and are no longer able to count on “shot-gun marriages” in the case of a pregnancy. This may explain an increase in out of-wedlock births following the pill and following the legalization of abortion.

Couple similarity may improve marriage viability. It also has consequences for the distribution of income. When only a husband works, and his income is twice as much as his brother’s, the first brother’s household is twice as rich as the second’s. If both brothers have a spouse making a similar amount, then the first household is still twice as rich as the second, but the difference between their incomes is doubled.

Declining Prominence of Marriage

A smaller percentage of westerners are married these days, because of people waiting longer to marry, people choosing not to marry, and people divorcing.

1) Age at Marriage has risen. In 1973 the average Canadian bride and groom getting married for the first time were 22.8 and 25.2 years old respectively , but in 2004 it was 28.3 and 30.3 years old. Economic contributing factors include increased availability of education for women and men, and increased economic opportunities for women. Economic consequences of rising age at marriage include the consequences of delayed fertility and a lower total fertility rate. The rising age of parents may have positive consequence for the viability of marriage, and the parents’ ability to take care of the children.

2) Marriage Rates have declined. In 1950, 80% of Americans aged 21-54 were married. That began to decline in the mid 1960s, with a fairly steep rate of decline over the 70s and 80s. In 2005, it was 60% of the American population married and even less for the Canadian population. Economic factors which have contributed to this include an increase in the standard of living which makes single living more affordable, and increased earnings opportunities for women outside the home which again makes the single life more affordable and, possibly, more attractive.

Again, the rise of couple similarity might stress partnerships in which the traditional specialization described in Becker (1981) has been assumed.

Figure 42-2 shows that marriage rates in Canada are not very much lower than historic levels. Most divorced people seek to marry again.

Figure 42-2. Trends in marital status.

Note: the data point for 1981 includes cohabiting couples

Data source: Statistics Canada series 051-0001, 051-0010, 075-0013, 075-0014.

Figure 42-3. Marriage rates by age and sex, 1981 and 2006, Canada.

Source: Statistics Canada, Report on the Demographic Situation in Canada, 2005 and 2006, Figure 6.1

Figure 42-3 shows both lower and delayed marriage rates for men and women.

To some degree the drop in marriages is made up by an increase in cohabitation, which we discuss next. However there is a net rise in the number of singles. In 1961, 8.6 were singles, but today (2011) it is double that at 17.1%. (Statistics Canada, Fifty years of families in Canada: 1961-2011)

The single life can be satisfying and productive. It is not as likely to produce children, however, so expect a drop in fertility when marriage rates fall.

There are also health consequences for single people, who typically must be economically self-sufficient and responsible for their own health. Married men live longer than unmarried men (for example see Lillard and Panis (1996)). This is likely because of protection conferred by not living alone, and because men who get married have characteristics that make them more likely to live healthy lives. However, Lillard and Panis (1996) found that it is not true that healthier men are more likely to get married; on the contrary, unhealthy men marry earlier than their peers, are less likely to divorce, and are more likely to remarry after being widowed or divorced.

Married women are also healthier than single, divorced, or widowed women – but only if they report a happy marriage. (Gallo et al. (2003)).

In terms of GDP per capita, single people look good for the economy. They work and can save without the diversion of childcare. They are available as community volunteers and activists, as well as supportive relatives.

3) Cohabitation Rates have risen. Cohabitation was relatively rare in the West before 1970, but it has grown in popularity steadily since then as you can see in Figure 42-4 below. This Figure does not include single people. In 2002, the american National Survey of Family Growth found that 50 percent of women aged 15-44 had cohabited at some point, and 9 percent were currently cohabiting. In Canada, most cohabitations do not end in marriage, but most marriages are preceded by cohabitation.

Figure 42-4. Distribution of Census Families by Family Structure, Canada, 1961-2011

Source: Statistics Canada. Fifty years of families in Canada: 1961-2011, Figure 1.

In some times and places, cohabiting couples have financial advantages over married couples, for example being able to file income taxes independently, or being able to receive more in welfare payments. In other respects, cohabitation may mean less entitlement to pension benefits (if a partner dies) or financial settlement (if the relationship breaks up.) Cohabitation may have economic consequences similar to the consequences of divorce (to be discussed later), in that there is some evidence that cohabitation represents more risk of break-up than marriage. Statistics Canada reported in 2006 that the risk of divorce in first marriage is 50% higher for those who lived common-law before marrying. The rate of separation of cohabiting couples exceeds that of married couples.

Economic factors which contribute to cohabitation include the financial cost of divorce, though this has been declining, and government regulations around taxes, welfare, and pensions, if you can collect more money by not marrying.

4) Divorce Rates have risen. In the United States, the divorce rate’s overall trend since 1860 has been upward. The divorce rate increased rapidly 1960-1981, but has fallen somewhat since then. Canada’s experience is similar; our divorce laws were liberalized in the late 1960s. In 2002, Statistics Canada estimated the chance of a couple getting divorced before their 30th anniversary to be 38% for Canadians, ranging from 22% in Nfld to 48% in Quebec. According to the 2001 Census, 25% of Canadian children experienced the separation of their parents before the age of six. The duration-specific divorce rate peaks at 4 years of marriage; after that, the rate of divorce falls steadily. The median length of marriage has been roughly 11 years since 1981.

Non-economic factors contributing to divorce include higher expectations for couple-compatibility, unclear expectations about gender roles, and higher expectations for self-fulfillment. Economic factors contributing to divorce include stresses due to unemployment and poverty, an increase in the average woman’s post-divorce standard of living, and the declining cost of arranging a divorce.

Economic consequences of divorce include increased demand for housing, a reduced standard of living for most spouses and children, and stresses on children which translate into lower economic achievement among other things. According to Stevenson and Wolfers (2007), children from divorced households fare worse “along a range of outcomes”; according to a Canadian government report on the National Longitudinal Study of Children and Youth , children growing up in single-parent families are more likely to repeat grades, have poor language skills, be in poor health, and have behavioural problems, even after accounting for differences in household income. However

-we do not know the counterfactual (how well those children would have done had their parents not divorced.)

-adults who divorce and those who do not may be different in some other respects. That is to say, unobserved factors may explain both divorce and poor child outcomes.

Kay Hymowitz (2006) was one of the first to observe that the rise of single parenthood since the mid 1960s took place disproportionately in poor, less-educated households, specifically, in African American households. Hymowitz says that 92% of US children whose families make over $75,000 a year live with 2 parents; the number is 20% for kids in families making less than $15,000 per year. Higher income children are more likely to have live-in fathers, older mothers, better-educated mothers, and employed mothers. Stevenson and Wolfers (2007) too note a “divorce gap”: U.S. divorce rates are higher, and remarriage rates lower, for those without a college education. This suggests that adverse effects on children fall mostly on children already disadvantaged.

Measuring Marriage and Divorce Rates

Like the crude birth rate and crude death rate, the crude marriage rate is the number of marriages per year, divided by the midyear population, and expressed as a number per 1000. The crude divorce rate could be computed the same way. These rates, however, do not tell us much. The mid-year population includes people who are already married, people who are divorced or widowed, and children too young to marry. Depending on the age structure of the population, the marriage or divorce rate may be very high when it appears to be low.

The rates with the most information have, as their denominators, the population “at risk” of the event in question. Children therefore, who are not “at risk” of getting married, should not be included in the denominator of a more informative marriage rate. For example, the first marriage rate of 21-25 year olds, that is, the number of marriages of 21-25 year olds who are getting married for the first time, divided by the number of 21-25 year olds who have never been married, is a much more informative statistic.

The refined divorce rate is the number of divorces per 1,000 married women.

Divorce is rather like fertility. Just as children can be born in various years, divorce can occur in various years. The most information is found in the various duration-specific divorce rates.

The duration-specific divorce rate, DSDR, is equal to

DSDR = 1000 x