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Demographic alternatives for aging: increased fertility rate, labour
force participation, or immigration
Open Republic: April/ May/ June 2006

	In this issue
			Shadow Economy – causes, size and dynamic effects Robert Klinglmair and Friedrich Schneider, Department of Economics, Johannes Kepler University Linz, Austria Rethinking the gains from immigration: theory and evidence from the US Gianmarco Ottaviano, Università di Bologna and CEPR, Giovanni Peri, University of California, Davis Demographic alternatives for aging: increased fertility rate, labour force participation, or immigration Robert Holzmann, World Bank and IZA Bonn. The trouble with Chomsky George Jochnowitz Chomsky and the West's new Fifth Column Kevin Myers New strategy needed in developing world Paul MacDonnell, director of the Open Republic Institute (ORI)

Summary: The paper investigates the alternatives for dealing with aging population and low or negative population and labour force growth in the labour of developed countries. Labour forces in Europe, Russia, the high-income countries of East Asia and the Pacific, China and North America are projected to fall by 29 million by 2025 and by 244 million by 2050. The labour forces in developing countries, predominantly in South and Central Asia and in Sub-Saharan Africa, are projected to increase by 1.55 billion. Policies deployed to address the problem in developed countries include measures to increase fertility back to replacement levels, encouraging greater labour force participation by the existing population, and increasing immigration. Each of these policies may partially compensate for the projected labour force gap by 2050. However a review of changes in policy required to effect a solution also suggests that governments may not be able to initiate or accommodate the required change.

JEL Classification: J11, I38, Q15. Keywords: demographic policy, aging, fertility rate, labor force, migration

1 INTRODUCTION

Demographic developments – in particular, population aging and migration are gaining increasing importance in the domestic and international policy debate. The demographic transition to older populations – rising life expectancy followed by falling fertility rates – is most advanced in the countries of the North. In these developed economies, this process will lead to low or even negative population growth, a declining labour force, and a rising share of elderly in the population. In the poorer countries of the South, the demographic momentum will, for some time, lead to rising numbers of births even as the fertility rate declines. In these economies, this will lead to a further rise in population and labour force. Table 1 summarizes key demographic characteristics of world regions that have been selected for the aging of their population, projected change in population size, and current income level.

These discrepancies in demographic, economic, and, often, political development have already contributed to rising migration from the South to the North. Although most of the 145 million official international migrants (175 million including refugees) migrated within the same regions in early 2000, the trend toward international and cross-regional migration is expected to continue and, perhaps, even accelerate (see table 2).

The size and direction of international migration flows are driven by demographic, economic, and political gaps between countries and regions. The rising demographic gap between North and South, however, can also be seen as an opportunity for welfare-improvement – a win-win-win solution for migrant-sending and migrant-receiving countries and for the migrants themselves (see Holzmann and Münz 2004). The World Bank has started to investigate the role of migration as a development instrument for its client countries, with an initial emphasis on the role of remittances (see Maimbo and Ratha 2005, Caglar und Schiff 2005, and the 2006 issue of Global Economic Prospects: World Bank 2005).

Increased migration to the North over the last decades has made migration a politically charged topic in many countries. But in the absence of strong managed migration, low or even negative labour force growth, together with higher share of elderly in the population, comes at a price for a country and individuals. This is most visible with regard to retirement income and health care provision, which rely on both labour force growth and a high ratio of active population to beneficiaries. But the potential impact goes well beyond mere fiscal considerations and concerns issues of economic growth, national security, and international status.

This paper investigates the two main alternatives to enhanced migration in order to compensate for demographic changes in the North: increased labour force participation and increased fertility within the domestic population. In order to do so, the paper progresses in three main sections.

The first presents briefly the most recent demographic projection of the United Nations (UN 2005), outlines some conceptual considerations why one should, or should not, worry about demographic disequilibria, and presents the main alternatives for dealing with them. A key message of this section is that the sources of aging matter, while efforts to stabilize the demographic old-age dependency ratio, compared to growth of the labour force, may not.

The second section presents three main scenarios for compensating low and negative labour force growth in the North: an instant move to total fertility replacement, enhanced labour force participation policies, and compensating immigration. A key message from these scenarios is that none of these policies alone may be able to compensate for the projected demographic changes.

The third section reviews the policy implications for the demographic adjustment of instruments to increase the fertility rate, increase labour force participation, or accommodate higher migration flows. The key message here is that governments may lack the policy instruments to initiate or accommodate the required change.

Table 1. Key demographic indicators in world regions

* International Dollars at Purchasing Power Parity

Table 2. Global estimates of official migrant stocks by region in 2000 (Thousands)

Sources: Holzman, Koettl and Chemetsky (2005), based on Harrison (2004).