The Threat of Zero Population Growth

The Washington Post reports on France's pro-family policies which it tells us are proving effective in combatting the "threat of zero population growth." While I am big fan of policies that lessen the burden on families raising young children, no one is ever going to scare me with the threat of zero or even negative population growth.

Economists know about the concept of productivity growth. Respectable rates of productivity growth easily offset the impact that a rising ratio of elderly dependents can have on living standards, as simple arithmetic shows.

I'll use some extreme numbers to show the case. Suppose that a country goes from having a ratio of 3 workers to retiree to 2 workers over a span of 30 years. This is roughly the pace in the U.S., which is extraordinarily rapid because of the large post-war baby boom cohort. Suppose further that the typical elderly dependent gets an income equal to 70 percent of the income of the typical worker. (This story ignores any benefits from a declining ratio of young dependents and it also assumes that the support for retirees comes entirely from the wage income of the working population.)

This arithmetic would require the payroll tax burden to rise from 18.9 percent to 25.9 percent. Now suppose that productivity growth averages 2.0 percent over this period. In this case, after-tax income would be 65.5 percent higher in 30 years, even with the higher dependency ratio. Should we be crying over this?

Of course a slower rate of productivity growth will mean that a growth in the dependency ratio poses more of a burden. If productivity grows at a 1.5 percent annual rate, then the after-tax wage will be 42.8 percent higher after 30 years. But note that plausible differences in productivity growth rates swamp the impact of the rise in dependency ratios. This hypothetical rise in dependency ratios reduces after-tax wages by less than 9 percent, while the difference in after-tax incomes resulting from the slower hypothetical rate of productivity growth was almost 14 percent. It is also important to remember that this calculation does not take into account all the ways in which larger populations affect living standards and the economy that may not be directly captured in GDP (e.g. pollution and crowding).

In short, it is silly to talk of threats of declining populations due to voluntary decisions by people not to have children. Any impact of rising dependency ratios on living standards can be easily offset by productivity growth. Tell the Post -- no more scare stories.

--Dean Baker

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