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

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).

2. WHAT ARE THE DEMOGRAPHIC PROSPECTS AND THE POSSIBLE CORRECTING POLICES?

Should the projected demographic changes and emerging demographic disequilibria give rise to worries and for what reasons? And what are the potential correcting policies? This section sketches both the projected demographic developments – according to the most recent medium variant projection of the United Nations’ 2005 projection – and a classification of world regions – according to their projected demographic development. This is followed by a brief clarification of some conceptual issues regarding the implication of these projected shifts for the financing of public programs, in particular, pensions and health care. The section ends with a short presentation of the main corrective policies.

2.1. The medium variant of the UN 2005 projection

The most recent demographic projections by the United Nations confirm that a demographic transition is taking place worldwide (UN 2005). The expected increase in life expectancy in most countries (except those severely hit by HIV/AIDS), combined with falling fertility rates in countries with a total fertility rate above the replacement rate and continuing low rates in countries with a total fertility rate below the replacement rate will substantially shift the demographic structure among countries and regions by 2050.

The main common and distinct demographic changes are:

• All countries in the world are aging, and the change is sometimes most pronounced in middle-income countries (such as China). This applies to all definitions of aging, such as the level and average population age, old-age dependency ratio (typically defined as the ratio of persons ages 65+ to persons ages 15-64), and share of elderly (ages 65+) in the total population.
  
• The total population in much of the developing world will continue to expand, as the strongest youth cohort ever enters the labour market.
  
• The old-age dependency ratio will increase in low-to-middle-income regions of Latin America, East Asia and the Pacific, Middle East, North Africa, and Turkey, South and East Asia, and Sub-Saharan Africa from as low as 0.06 (Sub-Saharan Africa in 2005) to as high as 0.29 (Latin America and the Caribbean in 2050), the total dependency ratio in these regions will either remain unchanged or decline significantly (such as for Sub-Saharan Africa) – see table 1.
  
• In the developed world in the “North” i.e. Europe plus Russia, the high-income countries of East Asia and the Pacific (Australia, Hong Kong, Japan, New Zealand, Republic of Korea, and Singapore), North America (United States and Canada), but also in China, the demographic projections under the medium variant foresee low or even negative demographic growth until 2050 and a substantial deterioration in both the old-age and the total dependency ratio within the next 45 years (table 3). For high-income countries in East Asia and the Pacific, the old age dependency ratio is projected to reach 0.63 in 2050, and the total dependency ratio is projected to be 0.88.
  
• The effects of these demographic shifts are even more pronounced when considering the impact on the labour force. For the medium variant, the labour force is projected to decrease until 2025 in Europe plus Russia and in high-income East Asia and the Pacific by 38 million and 6 million people, respectively. The decrease is projected to treble by 2050, including China, with a decrease of 89 million. And this projected change includes (moderate) migration assumptions. In a zero-migration scenario, the fall in the labour force would be more pronounced for Europe and high-income East Asia and the Pacific (but not China, which is assumed to remain a net exporter of migrants); North America also would see its labour force decline by some 9 million people by 2050 (see table 3). Under the zero-migration variant, the labour force in the North is projected to lose some 244 million persons, while the labour force in the South is projected to add some 1.55 billion, predominantly in South and Central Asia and in Sub-Saharan Africa.

Table 3. Dependency ratios and labour force, by region, 2005-50

Sources: United Nations (2005), author’s calculations

2.2. Some Implications of Demographic Disequilibria

These projected demographic shifts—in particular, the dramatic aging of the population, together with low or even negative growth of the population and labour force, in many countries in the North – are giving rise to many speculations. They include issues of national and international security, shifts in economic power, and consequences for the financing of national social programs, pensions and health care.

Such public programs cater to the elderly but are financed by the contributions and non-consumed income of the working population (whether they are pay-as-you-go financed or pre-funded). They already consume a major share of the general budget and national output in the richer (and less rich) countries in the North. Some estimated 15 percent of GDP, on average, goes to public pensions and health care in the Organisation for Economic Co-operation and Development (OECD) countries, and an additional 5 or more percentage points of GDP are needed for privately financed pension income and health outlays. The projected demographic shifts (in North and South) are rightly expected to put further pressure on these already stressed social programs and public budgets.

This subsection attempts to clarify some critical conceptual issues linked with population shifts and pension and health care programs in order to inform the following discussion of corrective demographic policy actions and general policy requirements. The issues addressed concern:

1. the irrelevance of the type of funding when faced with demographic shifts;
2. the dependence of benefits on the explicit and implicit rates of return;
3. the dependence of the implicit (and explicit) rate of return on the demographic structure and dynamics of a country; and
4. the importance of the causes of aging (reduced fertility or longer life expectancy) for policy reaction.

For the financing of pensions and health care, the form of financing (pay-as-you-go or pre-funded) matters much less than often assumed (see, for example, Holzmann, Hinz, and Bank team 2005). In the end, all of these outlays need to be financed out of current GNP and each generation of retirees and consumers of health care needs the next generation to pay contributions or to buy the accumulated assets. The form of financing matters with regard to the quality of collateral: Do the contributions and insurance premiums create property rights? Do they contribute to enhanced national savings?

As a result, policies that affect the number of individuals as payers of contributions or buyers of assets matter for the financial sustainability of these schemes.
While the notional (pay-as-you-go) or actual pre-funding of pension benefits is easily understood, the pre-funding of health care benefits is often not. Health care benefits – whether public or private – typically do not work as a spot insurance market in which the premium is determined by the current-period risk profile of the insured, which is typically related to age. This would make health insurance unaffordable for most elderly. As a result, the typical health insurance premium is above the current-period actuarial expenditure level at a younger age and includes a component of savings to finance future expected health care expenditures above current contribution revenues. This makes both health care and pension benefits dependent on the explicit or implicit rate of return of these social programs. And these rates of return are closely linked to the demographic structure.

It is increasingly understood that the explicit or financial rates of return are also dependent on the demographic structure and dynamics of a country. The savers of assets for retirement income or health care benefits need the buyers of these very assets once they need to sell them. International diversification of these assets in view of asymmetric aging across countries helps at the margin, but it does not constitute a solution (Holzmann 2002). And the interconnectedness of capital markets makes national interest rates also dependent on global demographic trends (McKibbin 2005). The implicit rate of return of unfunded systems is closely linked to the growth of the base of contributions (which depends on productivity growth/the growth of real wages per capita, and the labour force/the growth in the number of contributors).

Hence projected demographic shifts will influence the internal (and external) rate of return and thus the capacity to deliver pension and health care benefits through three channels. First is the change in labour force. For some regions, the impact of the projected fall in the labour force during the next 45 years is quite substantial. In Europe plus Russia, the impact would amount to a reduction in the (implicit) rate of return in the range of 0.7 to 0.9 percent annually. For North America, the assumed migration will add almost 0.6 percent annually to the rate of return during the next 45 years. Second is the impact of aging on productivity growth. There are a number of reasons why an aging labour force may exhibit lower productivity growth per worker, taking into consideration knowledge creation and entrepreneurial spirit. Econometric evidence for 115 countries suggests that the share of the elderly population has a statistically significant impact on growth of real GDP per capita (IMF 2004). This research suggests a reduction in the annual real growth rate of GDP per capita of 0.5 percent, on average, by 2050 (Martins et al. 2005 and IMF, 2004). Third is the impact of population aging on the ratio of assets to liabilities of unfunded pensions. While aging increases the liability position, it also increases the asset position by increasing the average number of years between contribution payments and benefit disbursement.

Population aging can occur as the result of a reduction in the total fertility rate or an increase in life expectancy. In the real world, both effects occur at the same time and have been of roughly similar magnitude in many countries in recent years. But the effects on social programs and hence the policy conclusions are not identical. With a total fertility rate at the replacement level (which in highly developed economies is in the range of 2.05 to 2.1 children per woman, but can be as high as 2.64 in countries such as Namibia if mortality rates are high throughout the fertility period), population aging occurs through a fall in the age-specific mortality rate, which raises life expectancy at all ages. In developing countries, recent gains in life expectancy have occurred at young ages; in highly developed economies, the gains have occurred at older ages (60 and beyond), as the mortality rates at younger ages are already low. A gain in life expectancy of some 10 years at age 60 – from 80 to 90 – and deterioration in the (demographic) old-age dependency ratio from, say, 2:1 to 3:1 can be easily addressed by raising the retirement age by 6.6 years. This would reestablish financial balance in the old-age income system and leave the internal rate of returned largely unchanged.

With a given life expectancy, population aging is driven by a fall in the total fertility rate. This also occurs when total fertility rates are falling and rates are above the replacement rate. If left constant, this situation leads to a constant population structure and a permanently growing population. At constant total fertility rates below the replacement level the population is permanently shrinking. While the deterioration in the population structure and the resulting increase in the old-age dependency ratio can be corrected by an increase in the retirement age (as under rising life expectancy), the fall in both population and size of the labour force needs an additional correction to deal with the otherwise lower benefit level due to lower implicit rates of return.

The above estimates suggest that some countries and regions have an aging-induced deterioration in the internal rate of return for pension income of 1.3 percent a year (0.8 percent due to the smaller labour force and 0.5 percent due to lower productivity growth). Such calculations do not include the price effects for retirees of higher personal health care costs, which are likely to reduce income by a similar magnitude. Nor do they include the effects of lower rates of return on pre-saving in health care insurance. Yet such a reduction in the annual rates of return over a whole life cycle has important implications for benefit levels. In a life-cycle setting, a 1 percentage point (100 basis point) lower rate of return translates broadly into a 20 percent lower pension benefit. The actual magnitude of a deteriorated rate of return may require compensation in a reduced replacement rate which exceeds 30 percent or more.

2.3. The set of corrective policy options

This subsection sketches the set of corrective demographic policy options, which includes a higher total fertility rate (that is, more children per family), higher labour force participation of the existing population, and increased immigration. There is, of course, a much larger set of potential non-demographic corrective policy options, such as enhanced productivity growth per employee or international diversification of investments. Although such policies may prove important, they are beyond the scope of this paper and are conjectured not to be full substitutes for the demographic policy options addressed here.

Higher total fertility rate

Fertility rates at the beginning of the new millennium reached a new low in many countries and regions: Russia, 1.2; Europe and Japan, around 1.4; China, 1.7; and North America – almost 2.0. The medium demographic variant assumes some recovery in the total fertility rate for Russia, Europe, Japan, and China toward 1.85 and a slight fall for North America by the end of the projection period. In all cases, the replacement level would not be reached by 2050.

One potential policy option is to attempt to reach a replacement-level total fertility rate as soon as possible and keep it there. This would stabilize the labour force in the long term and, eventually, create long-term population growth, but solely through an increase in life expectancy (or immigration). The short- and medium-term effects, however, would be limited. The past decline in the total fertility rate has already reduced the number of women of child-bearing age, so the increase in crude birth rates would be limited. And any increases in the number of births would need some time before they have an effect on the labour market – that is, some 15 years or more.

Furthermore, this option would contribute to an immediate deterioration in the total dependency ratio – that is, the sum of the youth dependency ratio (the ratio of ages 0–14 to ages 15– 64) and the old-age dependency ratio (the ratio of ages 65+ to ages 15–64).
Section 3 investigates the quantitative effects of this policy option, and section 4 sketches potential policy measures to make it happen.

Increased labour force participation

A second option consists of increasing labour force participation – that is increase the share of population participating in the labour market, including the elderly. While such an increase in labour force participation can expand the total labour force and hence may compensate for a fall in population in potentially active age brackets, it requires more: If the active population continues to decrease, even a partial compensation will require a continuous increase in the labour force participation rate. And increased labour force participation will not translate 1:1 into increased social benefits as such an approach would postpone, but not solve, the underlying financing needs of such programs.

Increased immigration

A simple mechanism in quantitative terms to compensate for low or negative population growth is to import population from other countries. Such an approach promises a number of direct advantages for the migrant-receiving countries. First, most of the migration typically takes place among person’s ages 25 to 35. Hence immigration immediately enhances the labour force, while only gradually contributing to a higher dependency ratio. Second, given an assumed elastic supply of migration-willing individuals in developing countries, this policy may, in principle, compensate extremely well for any population gap in quantitative terms and, with an appropriate filtering mechanism for a gap in skills and other characteristics. Last but not least, with appropriate policies and incentives, part of the migrant population may be induced to return to the sending country. The experience with such gap-filling immigration approaches, however, has met its limits, to which we return in section 4.

3. SCENARIOS OF DEMOGRAPHIC OPTIONS

This section presents broad estimates of the extent to which the demographic gap in the North can be compensated for by the corrective policy options just outlined. The section relies on special scenario projections produced by the demographic division of the United Nations.

3.1. Instant move to replacement-level fertility rate

The first demographic option investigates the effect of an instant move to a total fertility rate at the replacement level. The possibility of such a move is clearly unrealistic, but it serves as a useful benchmark for less drastic policy options. Table 3 presents the change in total population by main age groups for the two periods under investigation
(2005–25 and 2005–50).

For all regions, the impact on the young age group is proportionate to the distance to replacement level during the prior 20 years. The population surplus is moderate for North America, as actual fertility rate is close to replacement level, but is substantial for all other deficit regions. The population deficit is high for Sub-Saharan Africa, with a total fertility rate well above replacement, but is more moderate for other surplus regions in 2025. The impact on the active population group by 2025 is still small in both deficit and surplus regions.

By 2050 the impact on the young age group is, in aggregate, mitigated by the past total fertility rate in the medium variant. However, for fertility-deficit regions, the accumulated lagged effects of a higher total fertility rate become visible in the active population group: the projected population gain for this age group is more than 230 million. For the world as a whole, the overall population effect is mitigated by the dominant effect of reduced population for Sub- Saharan Africa under a replacement-level total fertility rate.

Table 4 translates changes in the size of population in 2025 and 2050 into changes in total labour force numbers induced by the replacement-level total fertility rate compared to the medium variant. As expected, the impact on both projected initial-surplus and -deficit countries in 2025 is small. By 2050, the accumulated effect over 45 years is already well pronounced. For the initial-deficit regions, this amounts to a gain in total labour force of almost 200 million. For the initial-surplus regions, this amounts to a reduction in labour force of more than 380 million, a potentially welcome development in view of existing pressures on the labour market.

Table 4. Differences in the labour force between instant replacement and medium variant projections, 2025 and 2050, millions.

Sources: United Nations (2005) and author’s calculations

3.2. Alternative and combined policies

The investigated policy options have as a starting point the demographic projections without (net) migration. This baseline is used to obtain an unbiased estimate of the effects of three policy scenarios with regard to labour force participation. The investigated and estimated scenarios are the following:

1. Benchmarking. What would be the labour force effects if the countries and regions in the North would gradually increase their labour force participation rates to match those of countries with the highest rates in 2005? Three European countries (Denmark, Iceland, and Sweden) have rates well above those of other countries, including the United States, which comes close. Most countries are well below, in particular at higher age groups.
   
2. Gender gap. What would be the labour force effects if the labour force participation rate of women would approach that of men by 2050? In some countries, there is hardly any difference between women and men with regard to labour force participation, especially in the younger and middle age groups. In quite a number of other countries, the labour force participation of women remains low, much lower than that of men.
   
3. Retirement age. What would be the labour force effects of a major increase in actual retirement age by 2050? The estimated effects assume an increase of five years by 2025 and of 10 years by 2050. Currently, the difference in actual retirement across countries and regions is substantial, which suggests a highly differentiated impact.
   
4. Combined effects. What would be the effect of all three policy measures combined: that is, gradually but jointly matching the highest labour force participation rates, eliminating gender gaps, and substantially increasing the actual retirement age?

This section summarizes the main results and key observations. Table 5 presents the results by comparing the zero-migration benchmark and the four policy scenarios for the changes in the labour force between 2005–25 and 2005–50. Table 5 suggests the following key observations:

• Overall, there are strong regional differences in the impact of the policy options, the options selected, and the time frame.
  
• A combination of all measures is able to keep the change in labour force positive in all regions by 2025. Continued increasing of the labour force participation is not able to compensate fully for the drop in active population in Europe & Russia and the high-income countries of East Asia & the Pacific through 2050. Other policy measures would have to be added in order to stabilize the labour force. In China and North America, the combined measure would be sufficient to increase the labour force by 2050. But the drastic policies required to achieve this may warrant the partial substitution of an increase in the total fertility rate and migration.
  
• The results signal different starting positions, leading to differentiated impacts on the labour force across the regions. Benchmarking of labour force participation has little effect on China in both periods, indicating a high level of participation for the main age groups. In contrast, this measure is highly effective in reducing the expected fall in the labour force in Europe & Russia. However, eliminating the gender gap has large effects in China and the high-income countries of East Asia & the Pacific, but moderate effects in Europe & Russia and North America, confirming the low rate of female labour force participation in countries like Japan and Korea. Raising the actual retirement age is, in most but not all cases, the most effective policy measure to compensate (partially) for low population growth.
  
• The aggregate effect of the combined measures on the labour force is impressive. In the regions with a potential deficit, it amounts to a projected gain in labour force of 175 million by 2025 and 335 million by 2050. This compares quite favorably with the estimated effects of an instant move to the replacement-level total fertility rate, which is only 17 million by 2025 and 187 million by 2050.

Table 5. Change in the labour force by policy variant, 2005-2025 and 2005-2050, Millions.

Source: United Nations (2005) and author’s calculations

3.3. Migration needs to keep the labour force constant at the 2005 level.

At current labour force participation rates and in the absence of migration (benchmark), the labour force in Europe & Russia will decline by 46 million during the period 2005–25 and by 118 million during the whole period analysed, 2005–50 (tables 5). Labour migration might compensate for the whole “gap.” But, in this case, between 2005 and 2025, Europe & Russia will have to add a net amount of 2.3 million migrants annually to its work force. And between 2025 and 2050, this number will have to increase to 2.9 million migrants annually. Assuming that, at best, 70 percent of newly arriving immigrants join the work force, the annual net gain from migration will have to be on the order of 3.3 million annually until 2025 and 4.1 million annually between 2025 and 2050. Under these assumptions, between 2005 and 2050, a net migration gain of 169 million people aged 15 to 64 will be required to add 118 million economically active migrants to the labour force of Europe & Russia (table 6). This figure is based on the demand for labour under the zero migration benchmark scenario. This does not account for children below the age of 15 and elderly aged 65 or older, which would add another 15 to 35 percent (Migration Policy Institute, 2005). The annual migration needs of EU25 alone are 1.3 million prior to 2025 and 1.6 million up to 2050. This would lead to net migration well above European levels in the recent decades.

Table 6. Required net and gross migration to hold the labour force constant, 2005–25 and 2005–50. millions.

Source: United Nations (2005), author’s calculations

The corresponding magnitude for other regions with a potential deficit is less dramatic but, in aggregate, is still half that of Europe & Russia. While China is projected to have a labour force surplus during the period 2005–25, to compensate the gap of 85 million by 2050 may require a total net migration of 121 million in the period 2025–50, or more than 4.8 million migrants annually. The equivalent values of total net migration remain small for North America, at 13 million.

When taking these dimensions into account, one might conclude that net immigration on the order of some 200 million people (compared to the starting population of 745 million in 2005) is beyond Europe’s & Russia’s integration capacity. The same conclusion may be reached for the high-income countries of East Asia and the Pacific, which may need to absorb a total net immigration of some 60 million (compared to a starting population of 212 million in 2005). But in this context, net migration is not the only factor.

Both for recruitment and for an assessment of integration capacities, we also have to take into account the absolute number of migrants. For this it is important to note that in the past many people migrating to Europe or other parts of the North did not stay for good; instead, they eventually returned to their country of origin. For example, during the 1990s, 88 percent of Polish nationals migrating to Western Europe returned to Poland. During the same period, 63 percent of Turkish nationals migrating to Western Europe returned to Turkey. We have to assume that circular movements and returns to the country of origin will remain an important element of future migration patterns. Under this assumption, admitting or recruiting a net amount of some 200 million migrants (as discussed for Europe & Russia) may require a pool of some 280 million to 570 million of total migrants, depending on the rate of circularity and return.

Such calculations suggest that admitting or recruiting labour migrants (and dependent family members) can only be one part of a policy mix addressing the medium- and long-term labour market problems of countries and regions with fertility deficits.

4. POLICY IMPLICATIONS AND REQUIREMENTS

The demographic scenarios presented in section 3 investigate the magnitude of a potential measure to compensate for population aging and negative labour force growth in the North. While each of the broad policy approaches—higher fertility rate, higher labour force participation, and larger migratory inflows—may partially or even fully help to stabilize the labour force in the North, the actual policy measures with which to achieve such changes may not be available, effective or efficient, or may create problems of their own. This section sketches some of the key policy issues, including the identification of some important questions for future policy research.

4.1. What can governments do to increase the fertility rate of a country?

Two sets of public instruments are typically evoked to foster a fertility decision: offer direct monetary or real transfers and reduce the opportunity costs of female labour force participation. A third set of measures seems to be the pet of only a few academics and politicians: reduce the negative fertility effects of existing social programs, in particular, pension schemes.

Provide transfers in cash or kind. A number of countries provide monetary transfers to families with children for reasons of income support, pro-natal considerations, or both. Such transfers include birth premiums, parental leave, family allowances that are sometimes differentiated by the number of children and housing allowances or preferential access to housing. The empirical evidence of such transfers indicates a low to moderate degree of effectiveness, if any (see Bjoerklund, 2002; Drago, Scutella, and Verner, 2002 and Neyer, 2003). There seems to be broad agreement that such transfers may influence the timing and spacing of children. But the long-run effects on the total fertility rate of mere transfers on their own seem to be very small. Such a result should come as no surprise because the present value of such transfers is dwarfed by the direct costs and by the opportunity costs of raising children.

Reduce the opportunity costs of female labour force participation. The limited effectiveness of traditional pro-natal instruments and the wish of many well-educated women to manage both a professional career and a family have focused attention on appropriate policy actions. The main set of measures concerns the access of families with children to day care centers (crèches, kindergarten, full-day schools) or simply the availability of nannies or live-in maids at reasonable prices and non-intrusive administrative procedures. Here government actions can be very supportive and apparently equally effective if done via budget expenditures (Sweden) or market mechanisms (the United States), as both countries have a total fertility rate of similar magnitude (see Caldwell, Caldwell and McDonald, 2005).

Reduce distortions in the fertility decision. There is a long-standing fear that a pay-as-you-go pension system introduces distortions in the fertility decisions of families. Indeed, there are good reasons to believe the pay-as-you-go system induces a moral hazard effect and reduces individual incentives to invest in human capital (see Sinn 2004 and Meier and Wrede 2005). The old-age benefit is fixed at the individual level, often scarcely linked to one’s own financial contribution and certainly independent of whether one has any children at all. Therefore, individuals have little incentive to take such contributions into account when making fertility decisions and the incentive to form a family is affected by the implicit subsidy that defined benefits provide to single (childless) households. The empirical evidence seems to support the conjecture that public pension schemes have a negative impact on fertility rates. But while the effects seem to be statistically significant, the magnitude is small. For example, reducing the contribution rate in pay-as-you-go schemes by 25 percent would increase the worldwide fertility rate by 0.1 percentage point, say, from 2.2 to 2.3 percent (Ehrlich and Kim 2003).

4.2 How can governments support an increase in the labour force participation rate?

An increase in labour force participation can be affected at three levels: raising the labour force participation of women closer to that of men, raising labour force participation for all workers, and raising the labour force participation of elderly workers.

Increase female labour force participation. Reconciling work and family by increasing female labour force participation is closely linked to the policy measures discussed above. More basically, female labour force participation is closely linked to the education level and the incentives and aspirations of women to use their educational achievements. A successful inclusion in the labour market, however, contributes to a delay in the age of first birth. In many OECD countries, a substantial and increasing share of women (20 percent and more) are having their first child at the age of 40 and older, reducing the total number of children per woman.

Increase the labour force participation rate overall. The overall increase in the labour force participation rate is linked to the performance of the labour market and its capacity to handle the challenges and opportunities of globalization. Worldwide and also in OECD economies, there is a fear that globalization leads to job losses and lower wages. Unemployment remains stubbornly high in many countries in Europe & Russia, job creation is high on the agenda of China (with some 200-300 million internal migrant workers), and essentially all countries are concerned about the level of and increase in youth unemployment (for more on this see OECD, 2004c and Card, 2005, Boeri
and Bruecker 2005).

Increase the labour force participation of the elderly. Increasing the labour force participation of the elderly is high on the agenda of all countries as a means to deal with the issue of how to finance the pension schemes. As a necessary condition, this requires reforms of the pension system to make a postponement of retirement more attractive or simply to increase the minimum retirement age. In addition, however, employers must have an incentive to keep or hire elderly workers, which requires changes in the wage profile and rethinking the contractual arrangements between trade unions and employers (see Drinkwater and others, 2003; Commander, Kangasniemi, and Winters, 2003).

4.3. What can governments do to accommodate immigration flows to mutual advantage?

Filling labour force gaps in rich countries through migration seems to be an easy task in view of the excess supply of willing migrants from the developing world. Yet sentiments against migrants, especially in countries that have not traditionally received a large number of immigrants, and the discussion about the best approaches to integration indicate that the absorption of migrants into society is not easy. Is it possible to call for workers alone, or is it necessary to prepare future citizens? Is a short-term guest-worker concept feasible in view of the gross number of immigrants required? In addition, many other policy areas need to be addressed. The three addressed here often receive insufficient attention.

Adjust the economic environment. Large-scale immigration over a long period of time is like a sequence of supply shocks to which the economy needs to adjust. As with other shocks, it is best absorbed in an economy with sufficient flexibility, including flexibility in the markets for goods, services, and factors of production. Public management and support of migration flows are needed and important, but they cannot substitute for private initiative.

Such an approach seems to be successfully applied in the traditional recipients of immigration, such as the United States, Canada, and Australia. For example Card (2005) suggests that immigrants do not harm the labour market opportunities of native workers. This more positive assessment about the impact of migration is in line with other more recent as well as older research results. Boeri and Bruecker (2005) claim that the resistance of EU countries against migration is the result distorted labour markets. Under such settings their argument goes migration may entail significant direct and indirect costs. If correct, this would call for a fundamental review and adjustment of the economic environment in many nontraditional recipients of immigration (in Europe and elsewhere) before further large-scale immigration is envisaged.

Manage the skill mix. The net benefits of migration and their distributive effects between and within countries depend on the skill composition of migrants as well as of the labour force in the sending and receiving countries (see Drinkwater and others, 2003); Commander, Kangasniemi, and Winters, 2003; Borjas 1999). Selecting migrants with appropriate skills creates benefits for the receiving country but risks hurting the sending country. The experience in migrant-receiving countries suggests that they substantially underutilize the skill level of their migrants due to information problems and uncertainties about the value of skills, including academic training, received abroad (Reitz 2005).

Improve the portability of social benefits. For a variety of reasons, a substantial share of migrants returns to their home country after years of work abroad. And governments of host and source countries may wish to encourage return migration for various reasons. Governments of migrant-receiving countries may support return migration to stress the temporary nature of immigration for political reasons. Currently such decisions by migrants are very much distorted by lacking or incomplete portability of social benefits, in particular pensions and health care (Holzmann, Koettl, and Chernetsky 2005). As a result, many migrants do not return to their home country because they do not want to lose their access to social programs, or they prefer to work in the informal sector in order to avoid contributing to these programs, payments that become, in essence, a mere tax.

5. CONCLUDING REMARKS

There is broad agreement that population aging linked with low or negative population growth creates a major challenge for many countries and regions in the North, especially for Europe plus Russia, the high-income countries of East Asia and the Pacific, China, and, to a lesser extent, North America. Without further immigration, the total labour force in these countries is projected to decline by 29 million between 2005 and 2025 and by 244 million between 2005 and 2050. At the same time, population aging will accelerate, and the old-age dependency ratio will deteriorate further.

Although the full economic and social implications of such a dramatic shift in age structure are not yet clear, simple financial considerations suggest that a declining labour force and a deteriorating age structure will put further pressure on the financing of pension and health care programs. In addition, economic considerations suggest that a reduction in the implicit and explicit rate of return of pension and health programs could reach 1.5 percent and more annually.

To compensate for negative population and, in particular, labour force growth, countries have three main demographic policy options: move the total fertility rate back to replacement levels, increase the labour force participation of the existing population, and fill the demographic gaps through enhanced immigration.

Scenario calculations for the four potential-deficit regions suggest that each of these three options may assist in compensating for the demographic gap. Moving immediately toward a replacement level fertility rate in 2005 would create an additional labour force of some 17 million by 2025 and 187 million by 2050. Increasing labour force participation rates through three combined measures (moving toward benchmark countries, closing the gender gap, and raising the effective retirement age by 10 years) would add an additional labour force of 175 million by 2025 and 335 million by 2050 in aggregate (but would not fully compensate Europe plus Russia and the high-income countries in Asia). And enhancing net migration by 244 million people by 2050 to compensate for gaps in the labour force seems easy to achieve in quantitative terms but is only part of the story. One needs to consider “migration overhead,” which includes inactive migrant workers and family members in the range of some 50 percent—that is, think about total net migration on the order of more than 350 million (170 million in Europe plus Russia alone). The gross flows that take into account return and circular migration may more than double these already staggering magnitudes.

While the magnitudes involved are high and the underlying policy decisions drastic, even more limited numbers question the capacity of governments to create or accommodate the envisaged effects.

Empirical evidence suggests that governments have limited policy instruments with which to increase the fertility rate. Increasing labour force participation for all implies more successful labour market policies at a moment when many countries are struggling with the implications of a more globalized world. And accommodating a substantially larger number of migrants every year requires a major review of domestic policies and a rethinking of integration policies—an area where good practices have been little analyzed or broadly discussed.

This sobering assessment suggests that no single policy approach will, on its own, contribute significantly to covering the population gap, especially in high-deficit countries. It suggests that more knowledge is needed about the effectiveness and efficiency of policy measures to influence fertility and labour force participation and to better accommodate migratory flows. It also suggests the need to investigate measures beyond demography or simply prepare for a shrinking population in a number of countries, which some claim has advantages on its own.

References

Bjoerklund, Anders. 2002. “Does Family Policy Affect Fertility? Lessons from Swedish Policy Experiment.” Mimeo. Stockholm University.

Boeri Tito and Herbert Brücker. 2005. “Why are Europeans so tough on migrants?” Economic Policy 44 (October): 631-703.

Borjas, George. 1999. “The Economic Analysis of Migration.” In Orley Ashenfelter and David Card, eds., Handbook of Labour Economics, Vol. 3A. Amsterdam: North Holland: 69–133.

Caglar Ozden and Maurice Schiff (eds.). 2005. International Migration, Remittances and
Development. Palgrave McMillan: New York.

Caldwell, John, Pat Caldwell, and Peter McDondald. 2002. “Policy responses to low fertility and its consequences: A global survey”. Journal of Population Research 19(1): 1-24.

Card, David. 2005. “Is the new immigration really so bad?” NBER Working Paper No. 11547. Cambridge, Mass.: National Bureau of Economic Research.

Commander, Simon, Mari Kangasniemi, and L. Alan Winters. 2003. “The Brain Drain: Curse or Boon?” IZA Discussion Paper 809. Bonn: Institute for the Study of Labour, June.

Drago, Robert, Rosanna Scutella, and Amy Varner. 2002. “Fertility and Work/Family Policies.” Paper presented at the conference on “Opportunity and Prosperity,” University of Melbourne, April.

Drinkwater, Stephen, Paul Levine, Emanuela Lotti, and Joseph Pearlman. 2003. “The Economic Impact of Migration: A Survey.” FLOWENLA Discussion Paper 9. Hamburg : Hamburg Institute of International Economics.

Ehrlich, Isaac, and Jinyoung Kim. 2003. “Social Security, Demographic Trends, and Economic Growth: Theory and Evidence from International Experience.” Mimeo. State University of New York at Buffalo.

Harrison, Anne. 2004. “Working Abroad: The Benefits Flowing from Nationals Working in Other Economies.” Paper presented to the Roundtable on Sustainable Development, OECD, Paris.

Holzmann, Robert. 2002. “Can Investments in Emerging Markets Help to Solve the Aging Problem?” Journal of Emerging Market Finance 1 (2): 215–41.

Holzmann, Robert, Richard Hinz, and Bank team. 2005. Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform. Washington, D.C.: World Bank.

Holzman, Robert, Johannes Koettl, and Taras Chernetsky. 2005. “Portability Regimes of Pension and Health Care Benefits for International Migrants: An Analysis of Issues and Good Practices.” Global Migration Perspectives. Geneva: Global Commission on International Migration. Forthcoming.

Holzmann, Robert, and Rainer Münz. 2004. Challenges and Opportunities of International Migration for the EU, Its Member States, Neighboring Countries, and Regions. Stockholm: Institute for Futures Studies. ———. 2005. “Europe, North Africa, and the Middle East: Diverging Trends, Overlapping Interests, Possible Arbitrage through Migration.” Paper prepared for the joint workshop on “The Future of Demography, Labour Markets, and the Formation of Skills in Europe, and Its Mediterranean Neighbourhood,” European Commission, World Bank, King Baudoin Foundation, and European Policy Centre, Brussels, July 4–5, 2005.

IMF (International Monetary Fund). 2004. World Economic Outlook: The Global Demographic Transition (September). Washington, D.C.: IMF.

Martins, Joaquim Oliveira, Frederic Gonand, Pablo Antolin, Christine de la Maisonneuve, and Kwang Yeol Yoo. 2005. The Impact of Ageing on Demand, Factor Markets and Growth. Economic Working Papers No. 420. Paris: OECD.

Meier, Volker, and Matthias Wrede. 2005. „Pension, Fertility, and Education“. CESifo Working Paper No. 1521. Munich: CESifo. Migration Policy Institute. 2005.

McKibbin, Warwick J. 2005. The Global Macroeconomic Consequences of Demographic Transition. Paper prepared for G-20 Workshop on Demographic Challenges and Migration, Sydney, 27-28 August 2005.

Münz, Rainer, and Heinz Fassmann. 2004. “Migrants in Europe and Their Economic Position: Evidence from the European Labour Force Survey and from Other Sources.” Paper prepared for the European Commission, DG Employment and Social Affairs, European Commission, Brussels, and HWWA, Hamburg.

Neyer, Gerda. 2003. “Family Policy and Low Fertility in Europe.” Max-Planck Institute for Demographic Research Working Paper 2003-021. Rostock, July.

OECD. 2004c. Aging and Employment Policies: United Kingdom. Paris: OECD.

Reitz, Jeffrey. 2005. “Tapping Immigrants Skills: New Directions for Canadian Immigration Policy in the Knowledge Economy.” IRPP Choices 11 (1, February): 2–18.

Sinn, Hans-Werner. 2004. “The Pay-as-You-Go Pension System as Fertility Insurance and an Enforcement Device.” Journal of Public Economics 88: 1335–57.

United Nations. 2005. World Population Prospects. The 2004 Revision. New York: UN.

World Bank. 2005. Global Economic Prospects 2006: Economic Implications of Remittances and Migration. Washington, DC.: World Bank.