Labor Shortages?

A straightforward consequence of birth rates falling below replacement is the population aging. As fertility rates drop, emerging cohorts of babies comprise a smaller number of individuals than previous cohorts. This means that the median age of the population rises, as older cohorts account for an ever-larger percentage of total population.

As these smaller emerging cohorts themselves age, they eventually constitute the working-age population of the country. But since they do so in a context in which the elderly population accounts for an ever-larger share of the population, the working-age population represents a smaller share of the total population compared to previous years. On a long enough time scale, then, below-replacement fertility will ensure that the workforce shrinks not just in relative terms, but in absolute numbers compared to earlier years.

For capitalists whose businesses are predicated upon ensuring a reliable supply of workers, preferably at low wages, this impending labor shortage poses a challenge. The shrinking supply of laborers will, as a simple matter of supply and demand, push the price of labor upward. This means that operating a business with the same number of workers as previously will incur a heftier wage bill.

CNN’s article on falling birth rates quotes Simona Paravani-Mellinghoff, a managing director at the investment firm BlackRock, who articulates this worry: “A reduction in the share of workers can lead to labor shortages, which may raise the bargaining power of employees and lift wages.” Clearly, this consequence of falling birth rates is something only the buyers of labor power, and not those who supply it, have to fear.

But these projected labor shortages will only unfold over a time scale of many decades.  Fortunately for capitalists, they have an alternative to hiring from a shrinking domestic labor force, namely hiring immigrant labor. There is a longer-term issue with even this strategy of labor provision, however, as low-income countries around the world are also seeing their birthrates fall. Many low-income countries themselves have already arrived at below-replacement fertility rates. In the long run, it seems that such countries will be unable to provide comparable numbers of immigrant laborers as they had previously.

Slower Economic Growth?

Another worry often voiced about falling birth rates is that they will cause gross domestic product (GDP) to grow more slowly than it would otherwise. GDP, or economic output, can be mathematically decomposed into the size of the workforce multiplied by the level of labor productivity. If the former term is growing slowly, is stagnant, or is shrinking — as would follow from birth rates being below replacement for a sufficient period of time — then that will have a downward effect on output, all other things being equal.

For capitalists, economic growth is a critical motor for their profits. Fast growth means high rates of return on existing investments, and the profits earned from such activity may be plowed into additional investments. Workers have an indirect stake in this profit-making activity, since any surplus yielded from production has — with sufficient labor organization and/or redistributive government policy — a chance of being wrested away from capitalists into workers’ hands. And greater investment typically leads to greater employment.

More directly, however, workers’ well-being may be measured by their living standards, which can be approximated by some measure of average income, i.e., what slice of GDP the typical person receives. Declining population putting downward pressure on GDP, even to the point of its shrinking, would not necessarily mean that the average income of the population would drop, for a couple reasons.

First, there is the countervailing contribution that rising productivity could play in increasing living standards. Labor productivity, as a historical matter, is nearly always increasing, although how quickly it grows varies from year to year. Indeed, a situation of labor scarcity might induce capitalists to invest more in labor-saving technology, further boosting productivity increases. Second, and more important, average income would remain, as it is now, a distributional issue. If population shrinkage is itself responsible for a diminishing pie of GDP, it should not pose a technical problem to share out that pie in slices at least as large as before.

A hypothetical example can illustrate this. Suppose in an imaginary economy there exists only one firm, with one capitalist and ten workers. Every year, each worker produces $100,000 worth of output and takes home a $50,000 wage, and the capitalist, by virtue of mere ownership, takes home $500,000. So the GDP is one million dollars total, and each worker produces a profit of $50,000 for the capitalist. But then suppose population declines such that there are only half as many workers, lowering their number to five. Assuming the gains from output are again distributed equally between the one capitalist and workers as before, each worker will maintain a $50,000 wage even though GDP has dropped by half to $500,000. The capitalist, on the other hand, is only taking home half as much profit — hence his whining about the possibility of this scenario transpiring.

Suppose, additionally, there has been an increase in labor productivity of 20 percent. That means output per worker will rise to $120,000, raising GDP to $600,000. Depending on how the class struggle unfolds to distribute this new income, this could mean that wages could rise 20 percent to $60,000 per worker or alternatively capital’s share could rise 20 percent to $300,000 — or perhaps a settlement will be reached between these two extremes. (Labor’s or capital’s share of income could even increase beyond 20 percent if either ate into the original amount of income that the other started with before the labor productivity increase.)

Admittedly, this is a contrived example with an extremely small and simplified economy. But it illustrates that even dramatic population decline does not necessarily result in workers’ standard of living falling. Furthermore, it shows that in the context of rising labor productivity (or successful incursions by the working class on capital’s share of income), per capita worker income can even increase through a population decline.

The idea that low birth rates need not necessitate declining living standards is borne out by the experience of some of the countries that are lambasted in the press as demographic basket cases. South Korea, for example, which currently has one of the lowest total fertility rates in the world at 0.7 lifetime births per woman, has been below replacement-rate fertility for four decades. Despite the population remaining at a relatively stagnant level over the past decade, per capita income has been increasing roughly on trend with previous decades. Japan, whose population has been declining since 2010, also has seen gains in GDP per capita since that year. Similarly, Italy’s GDP per capita has increased by over 10 percent since its population peaked in 2014.

So slower economic growth due to lower birth rates, even to the extreme point of absolute population decline, does not in and of itself result in a decline in average living standards. It simply poses the old question of economic distribution on new terms.

Reduced Geopolitical Power?

Closely related to concerns about economic output are worries about the United States’ ability to project power internationally. Declining birth rates erode the capacities of the US military, both by restricting the tax receipts funding it and shrinking the size of the military-aged population available to be recruited. The baby bust pessimist Jonathan Last has written that “low-fertility societies . . . cannot project power because they lack the money to pay for defense and the military-age manpower to serve in their armed forces.”

Militaries around the world are feeling the pressure of the soldier shortage acutely. Branches of the American military, in particular, recently have been plagued by a “recruiting crisis” that has prevented them from meeting their manpower targets. Although the military’s dilemma has many causes, from disqualifying health conditions in many young adults to a military career lacking appeal relative to other pursuits, certainly a drop in the raw number of potential recruits is a contributory factor.

Concerns about US geopolitical decline in tandem with birth rates have been stated most candidly, and absurdly, by Matthew Yglesias, whose book One Billion Americans: The Case for Thinking Bigger advocates increasing the population of the United States from its current 341 million to one billion by (in part) increasing birth rates. The ultimate goal of this venture is to restore America’s geopolitical standing vis-à-vis China.

Putting aside Yglesias’s astounding population target, how we evaluate a proposal like his ultimately turns on our value judgments about US foreign policy. For those of us who are aghast at the destructive effects of recent American military adventurism and US imperialism broadly, such a plan is difficult to swallow. Advocating an aggressive military posture against nuclear-armed China seems, at best, extremely reckless. In any event, it is difficult to see how pursuing such a policy would benefit ordinary Americans.

Depleted Welfare State?

While geopolitical aggrandizement may not be of direct material concern to the average American, the sustainability of the welfare state is. A common anxiety about falling birth rates in the US context is the possibility that they will deplete the Social Security program. Even left-wing writers have warned of an impending “Social Security cliff” facing the United States in the not-too-distant future because of current demographic trends.

The reasoning for this worry is: Social Security is essentially a giant fund into which different segments of the population either pay into or withdraw from. Payments are contributed by those in the workforce, and withdrawals are made by the elderly. What level of disbursements Social Security is able to maintain is ultimately constrained by this balance of fiscal inputs to outputs. Lower birth rates entail that in the near future, people entering the workforce will make up an ever-smaller percentage of the population. So lower birth rates lead to the aggregate aging of the population over time, increasing the number of Social Security withdrawals relative to contributions and thereby stressing the fund.

Demographers have a way of modeling this balance that has the convenience of only requiring knowledge of the age structure of a population: the old-age dependency ratio (sometimes confusingly referred to simply as the “dependency ratio”) measures the ratio of elderly persons in the population to the number of working-age individuals. This figure has been rising over the past decades and is projected by the US Census to continue increasing into the future.

The old-age dependency ratio is useful for modeling the demographic situation of programs that provide benefits to the elderly, but it is misleading for calculating the ratio of all dependents to the working-age population, which more closely models what benefits workers are able to provide to the nonworking population. For that purpose, the total dependency ratio, which is the ratio of both youth and elderly to the working-age population, is a more appropriate measure. This ratio peaked in the 1960s, due to the large number of children the Baby Boom produced and, by the same Census calculations, is not projected to exceed that high level in the future. So from a purely demographic perspective, the level of aggregate dependency in the United States over the next several decades will, if Census projections hold, by no means be unprecedented.

While the old-age dependency ratio has the advantage of simplicity of calculation, it also has the disadvantage of ignoring economic factors that are essential for understanding the actual fiscal situation of the Social Security program. First, the number of people in either age group is an imperfect approximation of people who actually are paying into or withdrawing from the Social Security fund. Most notable, not every working-age individual is actually employed. Furthermore, not every senior is actually withdrawing from the fund. And seniors who continue to work also pay into the fund.

Second, and more important, dependency ratios do not account for the possibility that different workers could contribute different amounts of inputs to the fund. In particular, rising labor productivity over time would entail that the same number of working hours would be generating sufficient output to support an increasing number of dependents. Indeed, increasing labor productivity is precisely what has been happening over the past several decades. Projecting into the future, even historically low levels of labor productivity growth would ensure that the fiscal gain of more productive workers more than compensates for the increased disbursements caused by the shift toward the elderly in the old-age dependency ratio.

So why, given the past and likely future of labor productivity growth, is Social Security as presently constituted still predicted to face a funding shortfall in the middle of the 2030s? One contributory factor is the infamous fact that the benefits of increases in labor productivity have been largely accruing to capitalists in the neoliberal era, not workers. A welfare program like Social Security that is funded out of payroll taxes will suffer because of this, compared to a counterfactual scenario in which workers were seeing wages increase in lockstep with productivity improvements. And payroll taxes for Social Security are only levelled against individual income below $160,200, which forgoes the revenue that would otherwise be reaped from taxing higher-income earners.

For Social Security in particular, there are a variety of devices that could be implemented to avoid the fiscal cliff. Lifting the payroll tax cap is one obvious measure. Modestly raising the Social Security tax rate is another. We can imagine other fixes too. But this is more of a political issue — that is, successfully pushing a fix through the dysfunctional US legislative process — than a technical problem of implementation.

I have been using Social Security as an example, but the analysis generalizes to any welfare-state program that is funded by payments from workers to dependents. Demographic aging caused by birth-rate decline does not inevitably entail a rollback of the welfare state. What it may do is pose a choice between welfare-state cuts, on the one hand, or clawing away additional funds from capitalists and/or high-income earners, on the other. And we face this choice largely because workers have lost ground in the class struggle over the past several decades.

A situation that is often framed as an unfortunate consequence of not producing more babies is really more a matter of class conflict over distribution and austerity politics. Once again, declining birth rates merely raise old political battles anew.

Inflationary Pressures?

One worry about declining birth rates that usually does not get top billing is the possibility that aging populations might prompt increased levels of inflation. The political impact of inflation alone in the last several years, not to mention its economic effects, underscores that it must be treated as a serious concern. At the moment, however, it is unclear whether declining birth rates actually do produce inflation, and the existing international evidence suggests it does not.

Why might falling birth rates drive inflation? The increase in the old-age dependency ratio means that retirees will likely represent an increasing share of the population. Since retirees consume (often by drawing down savings) while producing nothing, in the context of a workforce shrinking relative to population, the balance of aggregate supply and aggregate demand in the economy will be tipped toward the latter. Coupled with the possibility of rising wages due to a tight labor market, this could mean higher inflation.

However, an opposing argument points to reasons that population aging might have the opposite effect of keeping inflation low. Retirees, even though they admittedly do only contribute to consumption and not production, tend to consume at a lower level than workers due to their budget constraints. Further, retirees spending down their savings could make capital scarce, thereby hiking the interest rate and depressing inflation. Also, low birth rates that advance to the point of population shrinkage could lower overall demand in the economy.

Whether pro- or anti-inflationary pressures are greater depends on many other factors as well. The trajectory of labor productivity has a big influence here, as it will determine how many workers are needed to produce to satisfy the consumption of a given number of nonworkers. And other relevant considerations like the share of national income accruing to workers and the retirement age will ultimately be determined by political struggles.

Looking at the empirical evidence, it seems that countries that have been exhibiting below-replacement birth rates for an extended period of time are not experiencing significant problems with inflation, putting aside the extraordinary effects of the COVID-19 pandemic. Japan, for instance, in the decades prior to the pandemic was beset by the opposite dynamic of deflation. Other developed societies that have had below-replacement birth rates in the decades prior to the pandemic generally have had yearly consumer inflation increases below (often well below) 5 percent per year.

So, theoretically, while there may be reasons to suspect that aging populations put upward pressure on inflation, there are also reasons to believe that they have the opposite effect. So far as the real-world experience with low birth rates tells us, it doesn’t look like troublesome levels of inflation are produced by societal aging alone.

Desired Fertility

So, many reasons commonly cited for making increasing the birth rate a policy goal are not persuasive from a left-wing perspective. It is ironic, then, that those wringing their hands over how to sell the public on increasing birth rates often fail to cite a much more convincing reason: the average American would prefer to have more babies! Polls of US public opinion in the below-replacement-fertility era, no matter the source and methodology, have consistently shown that Americans are not reaching their desired fertility levels.

If the US government were serious about enabling Americans to have as many kids as they want, how would it be accomplished? People typically don’t produce children in pursuit of larger policy goals (aside from some fringe extremists, perhaps), so mere exhortation to reproduce for the good of the state or economy would not be effective. A more logical route would be to provide structural support to enable people to more easily increase their family size. This effort would include a familiar suite of social democratic welfare-state measures: universal health care, paid parental leave, subsidized child care, universal preschool, free school meals, and so on.

Unfortunately, countries that have implemented these measures have discovered that they are ineffective at raising birth rates. Birth rates in the paradigmatic social democratic countries are below those of the United States: the total fertility rates for Denmark, Sweden, Norway, and Finland are 1.5, 1.4, 1.4, and 1.3 births per woman, respectively. The policy mix that is actually effective in raising birth rates has not yet been discovered, although that hasn’t been for a lack of trying internationally. (Contrast this to the record of the United States toward pronatalist policy, which more closely approximates: “We’ve tried nothing, and we’re all out of ideas.”)

But even if a more generous welfare state does not successfully raise birth rates, it is worth putting in place anyway because it eases the considerable burdens of current and future parents and children. It is a shame that the political right has managed to masquerade as a “pro-family” political force when it is dead set against providing the material support that would enable families to flourish. In this respect, the Left has a prime opportunity to seize the “pro-family” mantle from conservatives.