Population Decline - Economic Consequences

Economic Consequences

Further information: Dependency ratio and Pensions crisis

The effects of a declining population can be adverse for an economy which has borrowed extensively for repayment by younger generations. Economically declining populations are thought to lead to deflation, which has a number of effects. However, Russia, whose economy has been rapidly growing (8.1% in 2007) even as its population is shrinking, currently has high inflation (12% as of late 2007). For an agricultural or mining economy the average standard of living in a declining population, at least in terms of material possessions, will tend to rise as the amount of land and resources per person will be higher.

But for many industrial economies, the opposite might be true as those economies often thrive on mortgaging the future by way of debt and retirement transfer payments that originally assumed rising tax revenues from a continually expanding population base (i.e. there would be fewer taxpayers in a declining population). However, standard of living does not necessarily correlate with quality of life, which may increase as the population declines due to presumably reduced pollution and consumption of natural resources, and the decline of social pressures and overutilization of resources that can be linked to overpopulation. There may also be reduced pressure on infrastructure, education, and other services as well.

The period immediately after the Black Death, for instance, was one of great prosperity, as people had inheritances from many different family members. However, that situation was not comparable, as it did not have a continually declining population, but rather a sudden shock, followed by population increase. Predictions of the net economic (and other) effects from a slow and continuous population decline (e.g. due to low fertility rates) are mainly theoretical since such a phenomenon is a relatively new and unprecedented one.

A declining population due to low fertility rates will also be accompanied by population ageing which can contribute problems for a society. This can adversely affect the quality of life for the young as an increased social and economic pressure in the sense that they have to increase per-capita output in order to support an infrastructure with costly, intensive care for the oldest among their population. The focus shifts away from the planning of future families and therefore further degrades the rate of procreation. The decade-long economic malaise of Japan and Germany in the 1990s and early 2000s is often linked to these demographic problems, though there were also several other causes. The worst case scenario is a situation where the population falls too low a level to support a current social welfare economic system, which is more likely to occur with a rapid decline than with a more gradual one.

The economies of both Japan and Germany both went into recovery around the time their populations just began to decline (2003–2006). In other words, both the total and per capita GDP in both countries grew more rapidly after 2005 than before. Russia's economy also began to grow rapidly from 1999 onward, even though its population has been shrinking since 1992-93 (the decline is now decelerating). In addition, many Eastern European countries have been experiencing similar effects to Russia. Such renewed growth calls into question the conventional wisdom that economic growth requires population growth, or that economic growth is impossible during a population decline. However, it may be argued that this renewed growth is in spite of population decline rather than because of it, and economic growth in these countries would potentially be greater if they were not undergoing such demographic decline. For example, Russia has become quite wealthy selling fossil fuels such as oil, which are now high-priced, and in addition, its economy has expanded from a very low nadir due to the economic crisis of the late 1990s. And although Japan and Germany have recovered somewhat from having been in a deflationary recession and stagnation, respectively, for the past decade, their recoveries seem to have been quite tepid. Both countries fell into the global recession of 2008-2009, but are now recovering once again, being among the first countries to recover.

In a country with a declining population, the growth of GDP per capita is higher than the growth of GDP. For example, Japan has a higher growth per capita than the United States, even though the US GDP growth is higher than Japan's. Even when GDP growth is zero or negative, the GDP growth per capita can still be positive (by definition) if the population is shrinking faster than the GDP.

A declining population (regardless of the cause) can also create a labor shortage, which can have a number of positive and negative effects. While some labor-intensive sectors of the economy may be hurt if the shortage is severe enough, others may adequately compensate by increased outsourcing and/or automation. Initially, the labor participation rates (which are low in many countries) can also be increased to temporarily reduce or delay the shortage. On the positive side, such a shortage increases the demand for labor, which can potentially result in a reduced unemployment rate as well as higher wages. Conversely, a high population means labor is in plentiful supply, which usually means wages will be lower. This is seen in countries like China and India.

A smaller national population can also have geo-strategic effects, but the correlation between population and power is a tenuous one. Technology and resources often play more significant roles.