An Aging, Urbanizing World

Introduction: A Front-Burner Challenge for Global Manufacturers
In the early years of this century, U.S. manufacturers faced the rapid rise of large emerging market economies and the consequent enlargement of the global business environment. After the recession of 2009, the package of challenges began to shift from expansion to constraints. The recovery in key global regions has ranged from weak to moderate, and substantial uncertainty surrounds the outlook for world growth as a whole and for the policy environment in almost all major countries.

In addition to short-term economic uncertainty, manufacturers must consider the significant business implications of turns in population parameters that are occurring all over the world; demographics are no longer an academic matter. Population shifts are being felt very much in the present and are having a direct impact on the slow world rebound. Manufacturers must understand how dramatic demographic changes intersect with economic activity, and the resulting reshaping of the business climate in ways that would have been unimaginable just a decade ago. As I outline in the final section, demographic data and projections show that the era of constrained labor supply is just beginning. In the evolving global environment, manufacturers will continue to view developing economies as interesting and fertile ground in spite of current challenges.

This report offers a basic overview of the path of pivotal population variables both for the world as a whole and for major regions and countries. In the next section, the link between demographics and economics is summarized. Subsequent sections explore population growth trends, fertility/mortality shifts, changes in the age profile of global populations, and the acceleration of population concentration. I then offer a U.S.-China comparison to highlight trends in the largest industrialized and the largest developing economy. The report concludes with a discussion of the implications for manufacturers.

How Population Shifts Shape Economic Activity
In a 2005 paper, I reviewed key literature on the impact of shifting population dynamics on economic growth.Cliff Waldman, "China's Demographic Destiny and Its Economic Implications," Business Economics 40, no. 4 (October 2005), 32-45. I noted the agreement among experts that the normal demographic progression in any economy is from a profile of high fertility and high mortality to one of low fertility and low mortality.

Researchers have come to understand the forces that lower fertility rates—and the connection between fertility and mortality. Declining mortality rates, generated by the spread of medical technology and longer lifespans, which in turn are influenced by stronger economic growth, are known to influence household fertility decisions. With increasing confidence that offspring will survive into adulthood, there is a lower precautionary demand for children in developing societies where pension systems remain weak and adult offspring are counted on as support systems for old age. Further, economic development brings about higher levels of education and labor market opportunities for women, giving them an alternative to child rearing.

Population neutrality—the school of thought asserting that there is no demographic-economic relationship—has effectively been discredited.See, for example, David E. Bloom, David Canning, and Jaypee Sevilla, "Economic Growth and the Demographic Transition," NBER Working Paper No. 8685, December 2001. Economists have identified numerous transmission channels through which population shifts have economic impact. Labor supply and savings are two principle paths; they in turn affect wages, capital formation, and productivity.

Falling fertility and birth rates eventually result in a shrinking share of the population that is in the working age cohort (generally defined as either 15-59 or 15-64, depending on the analysis). A fall in the relative size of this cohort has a negative effect on labor supply and thus on potential economic growth, which is simply the sum of the growth in labor hours and the growth in labor productivity. As for household savings rates, it is well established that such behavior is age-sensitive. Younger and older people consume more than they produce while the working age population saves more and produces more.

The labor supply and household savings impacts of falling birth rates and aging have broad implications for other economic variables. Falling labor supply affects real (inflation-adjusted) wages over time. And labor constraints create incentives for productivity-enhancing automation, putting upward pressure on both productivity and skilled wages. A smaller pool of savings is, over the longer term, a negative for capital formation and thus for productivity.

There is notable complexity surrounding these demographic-economic relationships. Researchers have suggested that the impact of demographic change on economic prospects depends to some extent on the economy’s stage of development.See, for example, A. F. Darrat and Y. K. Yousif, "On the Long-Run Relationship Between Population and Economic Growth: Some Time Series Evidence for Developing Countries," Eastern Economic Journal 25, no. 3 (1999), 301-313. To explore this concept, I created a four-stage model of the evolution of this relationship. In the earliest stage of economic development, population growth is simply a consequence of weak economic growth and poverty. There is scarcity of educational and labor market opportunities, particularly for women. Infant and child mortality are high because of poor living conditions and scarce medical technology. Consequently, parents do not have high confidence in the probability of any one offspring surviving into adulthood. At the same time, lack of adequate pension coverage means that children are nonetheless seen as critical support systems for old age. Families are thus motivated to have larger numbers of children than would be the case in advanced economies.

In the second stage, the economy is shocked onto a faster growth path by such factors as policy reforms, new technologies, and trade agreements that create access to new markets. More rapid growth begins to correct some of the circumstances that resulted in unnecessarily high fertility rates. Job market and educational opportunities start to become more plentiful. With greater access to medical care, infant and child mortality begin to stabilize. As parental confidence in offspring survival increases and as women gain alternatives to child rearing, offspring demand declines at any given level of income.

In the third stage, markets develop and the recognizable outlines of a capitalist economy begin to take shape. During this time, population growth should be a positive for economic growth, provided that the necessary food, water, and shelter resources are in abundance. Stage 3 has its challenges: labor and capital markets tend to be highly imperfect, muting their capacity to translate population change into economic change.

In the fourth and final developmental stage of the paradigm, the known demographic-economic relationships of an advanced industrialized economy solidify. Labor and capital markets mature, and as economic development becomes more geographically even, a unidirectional relationship from demographic change to economic impact emerges. At this stage, changes in the fertility rate and the pace of population growth influence long-term economic growth.

While there is a certain fatalistic quality to the demographic-economic story, research has revealed the importance of policy. A recent paper noted the criticality of fiscal policy assumptions in determining the impacts of population aging on such variables as the return to capital and wages.Louise Sheiner, "The Determinants of the Macroeconomic Implications of Aging," American Economic Review 104, no. 5 (May 2014), 218-223. Governments can indeed have some influence on the way in which powerful demographic changes affect long-run economic prospects.

Slowing Population GrowthThe data used in this report were taken from World Population Prospects2012 Revision, United Nations Department of Economic and Social Affairs, with the exception of the urbanization data, which were taken from World Urbanization Prospects2011 Revision, United Nations Department of Economic and Social Affairs.
As shown in Figure 1, global population growth has been slowing dramatically since the mid-1960s.As indicated in the graphs, these data reveal the average exponential growth rates over five-year intervals. In the latter half of the 1960s, average growth was 2.07% per year. The rate decelerated over the decades to an estimated 1.15% per year for the 2010-2015 period and is projected to fall below 1% after 2020.

Figure 1 – Population Growth Rate by Level of Development

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

The more developed regions account for a large share of the slowing in world population growth.In both the population and urbanization databases, the more developed regions are Europe, Northern America (the United States, Canada, Bermuda, Greenland, Saint Pierre, and Miquelon), Australia / New Zealand, and Japan. The less developed regions consist of all regions of Africa, Asia (excluding Japan), Latin America, the Caribbean, Melanesia, Micronesia, and Polynesia. For a detailed list of the countries comprising major regions in both the population and urbanization databases, see http://esa.un.org/wpp/Excel-Data/definition-of-regions.htm. The population growth rate of these regions fell below 1% after 1965 and is an estimated 0.3% for the 2010-2015 period. UN demographers predict that by the middle of the current century, the more developed regions will be in a modest but long-term period of depopulation. While population growth certainly remains faster in the less developed regions, their collective growth rate is expected to slip below 1% after 2025.

Regional differences in the path of population growth are pronounced and revealing. For the 2010-2015 period, the average population growth rate in Africa is an estimated 2.46%, more than twice the rate for Latin America and the Caribbean, the second fastest growing region. Europe is experiencing the slowest population growth—an estimated 0.08%.

Figures 2 and 3 show the sharp differences in actual and projected population growth rates even within the groupings of advanced and developing economies. For the 2010-2015 period, annual population growth is estimated at 0.81% in the U.S. and 0.57% in the UK, in sharp contrast to Germany and Japan’s modest depopulations of approximately 0.1% per year.

Figure 2 – Population Growth Rate: U.S., Germany, Japan, and UK

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 3 – Population Growth Rate: China, India, Brazil, South Africa, and Nigeria

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Over the same period, average annual population growth in many of the major developing economies remains relatively robust, ranging from an estimated 0.61% per year in China to 2.78% in Nigeria. China is expected to experience a modest depopulation after 2030, something that is not in the forecast for the other countries in Figure 3 until after 2050 for Brazil, 2065 for India, and 2075 for South Africa.

The Components of Population Change
The inputs into population change—namely fertility, births, life expectancy, and deaths—are critical to understanding the economic impacts of slowing population growth. Since the 1950s, total fertility on a global basis has nearly been cut in half from an annual average of 4.97 children per woman during the first half of the 1950s to an estimated 2.5 children per women for the 2010-2015 period.

The fertility split between the more developed regions and the less developed regions is pronounced. The latter have an estimated average fertility rate of 2.63 children per woman for the 2010-2015 period, with the expectation that it will remain above the critical 2.1 threshold for population replacement until after 2080. At an estimated average of 1.68 children per woman for the more developed regions, population replacement is no longer a fact of life. While advanced economy fertility is expected to increase somewhat, it is also projected to remain below 2.1 children per woman through the end of the century.

Africa has an outsized fertility rate, with an estimated average of 4.67 children per woman for the 2010-2015 period, compared with 1.97 for Asia, Europe, Latin America and the Caribbean, and Northern America. Unsurprisingly, this wide differential will narrow, as Africa’s fertility rate is expected to fall precipitously over the next few decades and fertility rates in Asia and Latin America should decline slowly. Further, fertility rates in Northern America are expected to be relatively flat but rise slightly in Europe—still remaining below the population replacement rate through the end of the current century.

Figure 4 shows the path of fertility for the U.S., Germany, Japan, and United Kingdom. All are expected to remain below population replacement for the balance of the current century. Figure 5 shows these data for China, India, Brazil, South Africa, and Nigeria. The most dramatic path is Nigeria’s; from 1950 through and including the 2010-2015 period, Africa’s largest economy has had a fertility rate at or above 6.0 children per woman. Nigeria’s rate is expected to fall dramatically but remain above replacement for the balance of the century. Fertility rates in China, India, Brazil, and South Africa are either at or falling toward below-population replacement levels. Demographic dividends don’t persist indefinitely, even in large developing economies.

Figure 4 – Total Fertility: U.S., Germany, Japan, and UK

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 5 – Total Fertility: China, India, Brazil, South Africa, and Nigeria

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Life expectancy at birth is thought to influence fertility decisions as larger families become less necessary with the greater odds of offspring’s survival into adulthood. Thus, Figure 6, which shows the world’s rising average life expectancy, suggests a globally increased motivation for smaller families. It’s an impressive story. Life expectancy at birth rose from about 47 in the 1950-1955 period to an estimated 70 for the 2010-2015 period.

Figure 6 – Life Expectancy at Birth by Level of Development

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

The developed economies have a significantly longer average lifespan than the emerging nations. For the 2010-2015 period, life expectancy in the more developed regions is an estimated 78 years versus 68 for the less developed regions. The differential is expected to narrow slowly and modestly to eight years by mid-century; considering the 24-year difference in the mid-1950s, this represents the continuation of significant progress.

Of the four developed economies shown in Figure 7, Japan currently has the highest life expectancy at birth, an estimated 84 years, with the U.S. the lowest at 79. Figure 8 shows the converging path in life expectancy for five large developing economies.

Figure 7 – Life Expectancy at Birth: U.S., Germany, Japan, and UK

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 8 – Life Expectancy at Birth: China, India, Brazil, South Africa, Nigeria

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Median Age
Falling fertility rates and longer lifespans have increased the world’s median age, which fluctuated between 22 years and 24 years during 1950-1990, afterward rising to a forecasted 30 for 2015 (Figure 9). By 2040, the median is expected to be just under 35. The age spread between the more developed and less developed regions is large, with the former reaching 40 in 2010 versus 26 for the latter.

Figure 9 – Median Age by Level of Development

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 10 profiles median age by region. Europe and Northern America have the oldest populations, with median ages of 40 and 37 for 2010, respectively. The European aging challenge is expected to become more difficult; by 2035, the median is projected to be just under 46, then remaining relatively stagnant before rising to just under 47 by the end of the century. Northern America is expected to reach a median age of slightly over 40 by 2035 and then nearly 45 by the end of the century.

Figure 10 – Median Age by Region

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Within the developed and developing regions, median age exhibits interesting variations. Figure 11 shows the path of the median age for the U.S., Germany, Japan, and UK. Germany and Japan are expected to have median ages of approximately 48 in 2020 and 50 years or more by 2035. The median age in the U.S. grew from 30 in 1950 to 37 by 2010; it is projected to reach 40 by 2035.

Figure 11 – Median Age: U.S., Germany, Japan, and UK

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 12 shows the path of this measurement for China, India, Brazil, South Africa, and Nigeria. The most consequential and explosive age growth is occurring in China; from a median of just under 24 in 1985, it grew a sizable 11 years to nearly 35 by 2010. By 2025, the median age of what is currently the world’s second largest economy will just about reach 40. India and Brazil have significantly younger populations, with 2015 estimates of 27 for India and 31 for Brazil. It isn’t until the middle of the current century that Brazil’s median age is expected to approach China’s median.

Figure 12 – Median Age: China, India, Brazil, South Africa, and Nigeria

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Age Cohorts
The paths of two critical age cohorts matter for the economic impact of demographic change. The 15-59 group comprises those in the peak working years, while the 60 and older group consists of those nearing and in retirement (with official and actual retirement ages showing fairly significant variation among major countries).

Figure 13 shows the share of the total population in the 15-59 cohort for the world and the two key divisions. The global share peaked in 2010 at 62.3% and is projected to slip below 60% by 2035. For the more developed regions, the peak came five years earlier, at 62.9%, with a fall below 60% expected for 2015. The peak for the working age population share in the less developed regions was 62.4% in 2010, with a fall below 60% projected in 2045.

Figure 13 – Share of Population Ages 15-59 by Level of Development

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 14 shows the working age population share by region. In Africa, this percentage is projected to grow from 53.5% in 2010 to 60.4% by 2070. The peak in Latin America and the Caribbean of 62.9% is expected to be reached in 2020. Northern America, Europe, and even Asia are dealing with declining labor force shares.

Figure 14 – Share of Population Ages 15-59 by Region

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 15 shows working age shares for the U.S., Germany, Japan, and United Kingdom. By 2035, the 15-59 population share in Germany and Japan is projected to fall below 50%, at 49.9% and 47.8%, respectively.

Figure 15 – Share of Population Ages 15-59: U.S., Germany, Japan, and UK

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

For the world as a whole, the 60 and older cohort share is climbing, from 9.2% in 1990 to 11.1% in 2010 (Figure 16). As with median age, significant differences are present between the more developed and less developed regions. Between 1990 and 2010, the share of the 60 and older cohort in the more developed regions rose from 17.7% to 21.8%. In the less developed regions, the relative size of this group is not yet a significant issue in the aggregate; it rose from a 6.9% share in 1990 to 8.7% in 2010. It is not projected to exceed 10% until 2020. By contrast, nearly 31% of the developed world’s population is expected to be in the 60 and older age group by 2040.

Figure 16 – Share of Population Ages 60+ by Level of Development

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Specific countries reveal important distinctions often masked by regional aggregates. Figure 17 shows the path of the 60 and older population share for the U.S., Germany, Japan, and United Kingdom. In 2010, the 60 and older share in the U.S. was 18.5%. This group is expected to make up slightly more than one-quarter of the U.S. population by 2030. Japan’s 60 and older share was 30.7% in 2010 and is expected to reach an outsized 40% by 2035.

Figure 17 – Share of Population Ages 60+: U.S., Germany, Japan, and UK

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

The path of the 60 and older share for major developing economies is shown in Figure 18. By 2035, this group is expected to account for more than one-quarter of China’s population. Currently, the shares in India, Brazil, South Africa, and Nigeria are notably lower.

Figure 18 – Share of Population Ages 60+: China, India, Brazil, South Africa, Nigeria

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Urbanization
As the world’s population has aged, people have shown a general tendency to concentrate. Figure 19 shows that, as of the latest data point of 2011, 52.1% of the population resides in urban areas. This is largely driven by the developed regions, where nearly 78% lived in urban areas in 2011. But urbanization is certainly a growing phenomenon in the less developed regions as well, where 46.5% resided in urban areas. This is expected to grow to 51.3% by 2020.Note: The definition of urbanization is country-specific and not harmonized throughout this data set.

Figure 19 – Share of Population in Urban Areas by Level of Development

Source(s): United Nations, Department of Economic and Social Affairs, World Urbanization Prospects, 2011 Revision

Figure 20 shows the urbanization path for the U.S., Germany, Japan, and United Kingdom. For the latest data point of 2011, Japan’s urban population share of 91.3% is the highest among these countries; the U.S. is in second with 82.4%.

Figure 20 – Share of Population in Urban Areas: U.S., Germany, Japan, and UK

Source(s): United Nations, Department of Economic and Social Affairs, World Urbanization Prospects, 2011 Revision

Figure 21 shows the urban population shares for major developing economies. Brazil is far and away the most urbanized, with 84.6% of the population living in urban areas in 2011. China’s path is one of rapid population concentration; more than half of the population currently lives in urban areas, and demographers expect a rise to 65.4% by 2025. In contrast, India remains an essentially rural nation, with a 2011 rate of only 31.3%; demographers do not expect it to surpass 50% until 2050.

Figure 21 – Share of Population in Urban Areas: China, India, Brazil, South Africa, Nigeria

PA-142_Figure_21.png

Source(s): United Nations, Department of Economic and Social Affairs, World Urbanization Prospects, 2011 Revision

U.S.-China Demographic Comparison
Demographic comparisons between the U.S. and China, the largest industrialized and the largest developing economy, are illuminating. Figure 22 shows slowing population growth in both countries. Since the mid-1990s, China’s population growth rate has been slower than that of the U.S., a dramatic shift from the 1950s through the early 1990s.

Figure 22 – Population Growth Rate: U.S. and China

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 23 shows that while both countries experienced a period of rapid decline in total fertility from the early 1950s to the mid-1990s, China’s decline was from much higher levels. At an annual average of 1.63 children per woman for the 2005 to 2010 period, China’s fertility rate is below population replacement, while U.S. fertility is right at the threshold.

Figure 23 – Total Fertility: U.S. and China

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 24 shows that the median age in the U.S. is expected to exceed China’s until 2025. In both countries, the share of the population in the 15-59 age cohort is in a downtrend (Figure 25) and the share of people 60 and older is on the upswing, with China’s 60 and older share expected to surpass the U.S. share starting in 2035.

Figure 24 – Median Age: U.S. and China

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 25 – Share of Population Ages 15-59: U.S. and China

Source(s): United Nations, Department of Economic and Social Affairs, World Population Prospects, 2012 Revision

Figure 26 shows that while the U.S. is a significantly more urbanized country, demographers predict that China will narrow the gap considerably in the decades to come. China’s urbanization plan, unveiled in March 2014, calls for sweeping changes to several aspects of rural-urban migration.

Figure 26 – Share of Population in Urban Areas: U.S. and China

Source(s): United Nations, Department of Economic and Social Affairs, World Urbanization Prospects, 2011 Revision

Implications for Manufacturers
Demographic data and projections show that the era of constrained labor supply is just beginning. The global fall in the share of populations in working age cohorts will most certainly keep human capital a front-burner issue for goods producers for decades, with implications for wages, the implementation of labor-saving technologies, and economic growth. Demographic shifts that are shaping the labor force are among the reasons for the lackluster performance of the world economy in the years following the 2008-2009 crisis.

The impact of urbanization and rural depopulation on economic growth is an area ripe for exploration. For manufacturers, population concentration adds a spatial element to the recruiting problem. Urbanization also has wide implications for the configuration of supply chains that will need to be increasingly geared toward urban labor supply and urban markets.

Considering the industrialized world’s significantly older populations and rapidly declining working age population shares, manufacturers will continue to see developing economies as interesting and fertile ground in spite of many current challenges. Even as Africa confronts substantial human rights challenges, its relatively young population and growing working age population share contribute to its attractiveness as a region for goods production and potential manufacturing profitability.

With appreciation to MAPI Economic Research Analyst Julia Edmonds for her excellent assistance with the data used in this report.

WorkforceKaryn Hill