Sunday, January 02, 2011

Japan's Changing Population Structure Will Lower Japanese Living Standards

Associated Press reports that Japan's population fell by 123,000 in 2010, or by roughly 0.1%. Yet the working age population is declining even faster.

 In late 2004, there were 85.08 million people aged 15 to 64, but by late 2010, that number had dropped to 81.07 million, an average annualized drop of 0.8%. Meanwhile, the number of people older than 65 rose from 24.88 million to 29.46 million, an average annualized increase of 2.9%.This increase has been almost entirely concentrated in the above 75 years group.

Japan's problem isn't so much the moderate decline in the overall population, but rather the dramatic increase in the number of old people relative to the number of available workers.

Dean Baker tries to make us believe that this is not a problem because he argues that it can be made up for by productivity growth.

But first of all, the point is that this change in population structure will reduce living standards compared to if it hadn't changed. There is no reason to believe it will boost productivity growth. If anything the opposite is true as the growing number of retirees will lower savings and therefore also investments.

With the working age population likely to shrink relative to the overall population by about 20% until 2050, this implies at least a 20% reduction in average income compared to if the population structure hadn't changed.

Secondly, simply transferring productivity growth isn't that easy since it implies higher taxes or alternatively that retirees will get even less compared to when they were working.

The only thing Baker is right about is that one way to combat this is to make older workers stay longer in the work force. That is the by far most effective way to deal with this problem because not only will it increase the number of workers, it will also reduce the number of retirees.

But as most workers would all things being equal prefer to retire earlier (In France, Greece and elsewhere, workers have striked to protest increases in the retirement age), that solution would also represent a negative effect of the change in population structure.