Falling birth rates lead to a sharp decline in living standards
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Many of the world’s richest economies will need to at least double their productivity growth to maintain historic improvements in living standards amid sharp declines in their birth rates.
A McKinsey report examining the economic impact of declining birth rates found that Britain, Germany, Japan and the United States would all need to see productivity growth twice as high as in the last decade to achieve the same level of growth in living standards since then maintain 1990s.
The consultancy’s report, published on Wednesday, showed that productivity growth in France and Italy would need to triple over the next three decades to match GDP per capita growth between 1997 and 2023. In Spain it would have to increase fourfold by 2050.
The report highlights the serious impact of falling birth rates on the world’s wealthiest economies, leaving them vulnerable to a shrinking share of the working-age population.
Without action, “younger people will inherit lower economic growth and bear the costs of more retirees while the traditional flow of wealth between generations erodes,” said Chris Bradley, director of the McKinsey Global Institute.
Governments around the world are struggling to contain a demographic crisis as housing and child care costs rise and social factors such as fewer young people in relationships play a role.
Two-thirds of people now live in countries with birth rates per woman below the so-called “replacement rate” of 2.1, while populations are already shrinking in several OECD member states – including Japan, Italy and Greece – as well as in China and many central and Eastern European countries .
“Our current economic systems and social contracts have evolved over decades of a growing population, particularly the working-age population, driving economic growth and supporting and sustaining people living longer lives,” Bradley said. “This bill no longer applies.”
Bradley, co-author of Wednesday’s report, said there is “no single lever to solve the demographic challenges.”
“It has to be a mix of more young people into work, longer working lives and hopefully productivity,” he said.
The report follows similar warnings from the Paris-based OECD, which said last year that falling birth rates were “threatening the prosperity of future generations” and urged governments to prepare for a “low-fertility future.”
McKinsey calculated that in Western Europe, the decline in the share of working-age people could reduce per capita GDP by an average of $10,000 per person over the next quarter century.
While some economists believe that generative AI and robotics could increase productivity, there is little evidence that this is happening in any meaningful way. Productivity across Europe has largely stagnated since the pandemic, widening the gap to the US since the financial crisis.
The consultancy argued that more countries need to encourage people to work longer, following the example of Japan, where the labor force participation rate for people aged 65 and over is 26 percent, compared to 19 percent in the United States and 4 percent in France .
Despite longer working lives, Japan’s per capita GDP has grown by just over a third of U.S. levels over the past 25 years.
“Demographic pressures are inexorable and severe, and when they hit, boosting productivity growth will become even more important,” the report said.
The consulting firm calculated that a German worker would have to work 5.2 additional hours per week to continue to increase living standards at the same rate, or that the share of employed people in the population would have to increase by almost 10 percentage points from the current level of almost 80 percent of people aged 15 to 64 years.
The UK and US would have a lower need for additional work due to a more favorable demographic outlook, but Spain and Italy would also need a double-digit increase in the share of the labor force.
