Economic View: How to grow old gracefully

We are all getting older, but some of us are getting older faster than others. Three news items last week highlighted the impact of changing demography on the world economy: the latest United Nations estimates of population change; some testimony from Alan Greenspan, chairman of the Federal Reserve Board, to the US Senate on the implications of ageing; and the 20 per cent rise – to 110,700 – in the number of asylum-seekers who came to Britain last year.

The UN figures carried several messages. The most important story from a global perspective was the further trimming of the expected growth of the world's population – for the saddest of reasons. As a result of the Aids epidemic, growth in the population of large parts of the developing world is expected to slow, with the overall consequence that the world's population will rise from its present 6.3 billion to about 8.9 billion by 2050. That is the middle projection: the UN also projects higher and lower figures, based on different assumptions about mortality and birth rates.

The vast majority of those additional people will be in the developing world (or what we still think of as that), with the result that there will be a further decline in the proportion of the world's population in developed countries, in particular in Europe – as the two pie charts, above, illustrate. Asia will dominate the world's population to an even greater extent than at present, while within the present developed world, the US will inevitably become more important over the next 50 years; and Europe will become less.

From our own narrower perspective, another element of the study pushes to the top of the news stories. It is the projected growth of the UK population, which is set to rise from its present 58.7 million to 66.2 million. Were this to happen it would be largely the result of migration, for fertility rates in the UK are expected to remain a little below replacement for the foreseeable future. This is consistent with the migration patterns of recent years, when immigration has comfortably exceeded emigration. A back-of-an-envelope calculation would show that net immigration of 150,000 a year would get us to around that 66 million figure by 2050.

What is less widely appreciated, however, is the relative impact on the UK compared with other developed countries. The bar chart above shows that the UK would experience the third-largest increase in population of the Group of Seven countries, with Italy in particular losing more than one-fifth of its population.

But will this actually happen? One of the lessons of population projection is that there are huge and growing uncertainties the further you look ahead. Thus the previous UN projections showed a decline in the UK population up until 2050, the revision apparently largely the result of revised estimates of migration. But the current pressure to come into the country may well subside, particularly if other EU countries were to experience faster employment growth. Whatever view you take about the costs and benefits of international migration, the plain fact remains that people go where the jobs are.

Whatever happens to population growth – or shrinkage – the developed countries will experience an ageing population. That will happen even in the US, which will be the youngest of the G7 in terms of the proportion of people aged over 65. As a result, people will have to retire later. The 76-year-old chairman of the Federal Reserve Board, unsurprisingly, thinks this may not be a bad idea. His testimony suggested that governments should craft retirement programmes and tax systems in order to ensure that older people were encouraged to stay in jobs. We are all pretty familiar with this, though the action taken so far has been minimal.

Dr Greenspan's most interesting idea, perhaps, was that shortage of labour would bring increases in productivity that would to some extent offset the effect of a shrinking workforce.

He pointed to the fact that labour shortage in the US in the early 19th century encouraged the country to look for ways of ways of increasing productivity, and that this was one of the reasons why the US surpassed Britain as the leader in technological innovation.

Will older people be less able to innovate? Well, in many of the sciences, the innovations of Nobel prize-winners were often discovered early in their careers. On the other hand, if the economic incentives are there, then the pressure to innovate ought to keep productivity moving forward. So things such as flexible labour markets and vigorous capital markets – and a willingness to attract migrants – ought to help the country adjust.

This must be right. We know that demographic change will happen. Yet there is huge resistance to dealing with its consequences. Perhaps the most important single competitive issue in the next few decades will be the ability of different countries to adapt. It will be a much more important issue than competence at manufacturing – the sort of issue that used to preoccupy the policy-makers, and to some extent still does.

This leads back to the immigration issue. We tend too often to think in terms of immigrants coming to this country to do the less-skilled jobs. Actually, as Dr Greenspan pointed out, the low-skilled jobs seem likely to continue to move to developing countries. Providing we attract people with the right skills, their greater contribution here could be towards boosting innovation, and hence productivity.

In other words, immigration can help us cope with the demographic deficit but in a different way from that which is generally expected. We need them for their innovation, not their grunt labour.