The greying generation is an old problem

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We should appreciate the extent to which the world economy has absorbed demographic changes in the last two decades without anyone really noticing. In the second part of a commentary on the debate about the employment of older people, John takes a look at 20th century population changes and their repercussions.

The two world wars of the 20th century had enduring but different effects on population. The conflict of 1914-18 killed and maimed young men in appalling numbers. Except in Russia, there were fewer casualties in 1939-45, and they were widely distributed among the civilian as well as military population. The first world war was followed by an abnormally low birth rate: rapid economic recovery after the second world war led to an unusually high birth rate.

And so, in 1980, the cohort of potential retirees – those aged between 55 and 64 and therefore born between 1916 and 1925 – was relatively small. Conversely, the 15-24 age group, the new workers born between 1956 and 1965, was relatively large. In Britain, France, Germany and even in the US, there were almost twice as many new workers as potential retirees.

The US was more successful at creating jobs for new workers, but wage earners gained little from the resulting economic growth, and inequality in income distribution widened considerably. Continental Europe resisted this trend: instead, youth unemployment rose and there was an explosion of what, in last week’s column, I called “quasi-retirement”. The official retirement age did not fall, but large numbers of older workers left the labour force, few with any intention of working again. These quasi-retired workers took advantage of benefits for sickness or disability until they reached normal pension age. Some were frustrated that their skills were no longer required. Others, with limited skills, welcomed the opportunity to escape dull jobs.

In 1980, there was little difference between France and the US in the proportion of working people aged 55-64. By 1990, a large gap had emerged in this age group: labour force participation was 38 per cent in France and 54 per cent in the US. The French experience was repeated across Europe, most of all in Germany where the ranks of the quasi-retired were swollen by reunification. This left many older workers in the east without hope of productive employment at wages comparable to their entitlement social benefits.

Perhaps, on balance, the more market-oriented American response was better. But the verdict is not obvious, and each continent experienced social tensions as a consequence of its choice. In any event, these are yesterday’s issues, not today’s. The cohort of new workers and the cohort of potential retirees are now both about 20 per cent of the working age population – pretty much the number that would be expected in a steady state. In Europe, the proportion of potential retirees still working stabilised in the early 1990s, and youth unemployment has been falling. In the US, the increase in wage inequality appeared to end in 1995 as the economy boomed.

The effect of these demographic fluctuations is not over yet. The baby boomers – the cohort of 1956-65 – will reach retirement age in the next two decades. If, like their predecessor generation in Europe, most stop work before retirement age, the costs will soon start to spiral. But this will probably not happen.

Metaphorically, even literally, there is always a queue of those hoping to leave employment and a queue of those hoping to join it. When – as in the 1980s – many are hoping to join and few are hoping to leave, participation rates tend to fall and so do the wages of people in work. We can opt for more of one and less of the other, but there is no avoiding this unpalatable choice. That was the dilemma of the 1980s; wages took the strain in the US and employment in Europe.

But when – as in the next decades – the queue of joiners is short and that of leavers long, we will face different options. With young workers in short supply, early retirement will no longer be readily available, and the tendency to greater wage inequality will be reduced.

Visions of apocalypse meet a deep-seated human need. The intellectual history of the last three centuries is full of mostly unfulfilled prophesies of doom. Future demography is a problem for the world economy. But before panic sets in, we should appreciate the extent to which that economy has absorbed demographic changes in the last two decades without anyone really noticing.

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