Where are the workers going to come from?

From Challenger Chief Economist Dr Jonathan Kearns

Globally fertility rates, measured as the number of births per woman, have declined markedly since the mid-1900s. Fertility rates are lower in high income countries, at an average of 1.5 births per woman they are well below the 2.1 babies per woman that would keep the population stable in the absence of net migration. South Korea has seen a very dramatic fall to less than 1 births per woman from almost 6 in 1960. Only in low income countries are average fertility rates above 2.1, for now at least. But the fertility rate for the whole world is 2.3, implying global population will continue to grow for now.

For a time, fewer babies reduces the dependency ratio, the ratio of dependants (those aged less than 15 and over 64) to the working age population (those aged 15-64). But with time, fewer babies reduces the number of workers and as older workers retire, the dependency ratio increases and working age population growth declines.

Japan and the Euro area have been leading this process with the dependency ratio having troughed before 2000. In Japan the working age population has been declining for almost three decades. In China and South Korea the dependency ratio has only reached a trough in the past decade with working age population starting to decline. In Australia and the United States where fertility rates are slightly higher and migration stronger the dependency ratio will increase by less. Within two decades the dependence ratio in Australia and the United States is projected to be below that of China.

Measures to restrict immigration in Australia will constrain the growth of the working age population, increasing the dependence ratio. Put crudely, there would be fewer tax payers to pay for the health expenses and aged pensions of older Australians. Expect additional policies globally over coming years to try to increase birth rates, although so far these have had limited effectiveness. Indeed, government policies may be more effective at reducing rather than increasing birth rates.

With working age population growth low or negative, GDP growth will be lower. This effect is most significant in Asia and Western Europe. And with dependency ratios increasing, GDP will need to be shared among more people, reducing the growth in living standards.