2015-06 The effect of aging population

During the course we will be talking about a very important change: the fact that populations of developed countries are aging rapidly. This will have profound effect on taxes, government revenue, retirement age and income in the future. The obvious effect is that, as there will be fewer working people for each retired person, the portion of national income that will need to be transferred from the working population to the nonworking population will increase. This article from the Economist talks about other effects of aging population:

• higher real interest rates
• higher wages
• reduction in inequality

The article attributes the changes to the end of two big demographic shifts

• entry of baby-boomers to the labour force
• the addition of China and the former communist countries to the world economy, which greatly increased world workforce.

The increase in the number of workers led to slow wage growth, and imports from China reduced the cost of manufactured goods, producing deflationary pressures and allowing central banks to reduce interest rates. In addition, the Chinese saved a lot, leading to further decrease in interest rates. Slow wage growth reduced the share of wages in GDP and led to higher inequality. These trend will come to an end.

As the population is aging, the pool of savings fall since old people save less than middle-aged people. There will be pressure for wages to rise as old people will require more help. Higher wages will increase the share of labour income in GDP.