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					                                 From boom to bust




         From boom to bust:
             fertility, ageing and
             demographic change
From boom Alasdair Murray
to bust?
Fertility, ageing
and demographic
change




Alasdair Murray


            DISCUSSION PAPER


                       
From boom to bust




Alasdair Murray

Alasdair Murray joined CentreForum in January 2006 as Director.
Previously he was Deputy Director at the Centre for European
Reform writing widely on all aspects of European politics and
economics. Before that Alasdair worked as a journalist for The
Times, serving as the Brussels and economics correspondent,
and a business reporter on the Mail on Sunday. His previous
publications for CentreForum include (as co-editor and author)
‘Britain after Blair: a liberal agenda’ (2006) and ‘Keeping up with
the pack: can government reduce health inequality?’ (2006).


Acknowledgements
Numerous people have influenced my thinking on this subject
over the last couple of years, but I would like to thank David
Willetts and Adair Turner for first highlighting many of the ques-
tions I have tried to tackle in this pamphlet. I would like to thank
Mark Bell, Tom Copple, Rob Evans, Josh Harris, and Louise Wise
for their invaluable research support, Russell Eagling for design
and layout, and the CentreForum team for their comments and
criticisms. The views expressed within and any errors are, of
course, the author’s alone.




ISBN 1-9026622-59-6
Copyright 2007 CentreForum
All rights reserved
No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, electronic, mechanical, photocopying,
recording or otherwise, without the prior permission of CentreForum.



                                      
                                                          From boom to bust




:        Contents
    Introduction                                               4
    1. The European demographic challenge                      8
    2. The economic impact of demographic change               20
    3. Demography and societal change                          35
    4. More people?                                            43
    5. Summary of recommendations                              59




         Tables
    1. Share of world population                               8
    2. Total fertility rates 1960-2005                         9
    3.   The number of workers per retired
         person 1950-2050                                      12
    4. Overall dependency ratios                               13
    5. Population change 2005-2050                             15
    6. Selected EU fertility rates                             16
    7. Childlessness                                           18
    8. Total economic dependency rates 1870-2050               24
    9. Growth and the proportion of over 65s 1995-2005 27
    10. Rise in age related expenditure as proportion of GDP   29
    11. Effective retirement age in selected EU countries      37
    12. Female employment rates and fertility (2002)           54
    13. UK female age at first birth and first mortgage        55




                                     
From boom to bust




:       Introduction

Europe stands on the cusp of a demographic revolution. In the
next few decades, the make-up of Europe’s population will change
substantially. The baby boom generation – that large cohort born
between the late 1940s and mid-1960s – will gradually move
into retirement, swelling the ranks of the over-65s. The genera-
tions behind are much smaller; the legacy of decades of low
fertility levels in almost all European countries.

These changing demographics pose a major structural challenge to
the European economy and society. Demography ranks alongside
climate change, security and globalisation as one of the key
concerns facing developed countries in the coming decades.

Most assessments of Europe’s future demography — especially
those conducted from the other side of the Atlantic — take a
deeply pessimistic view of the continent’s future. Commenta-
tors warn that changing demography threatens to blow a hole
in public budgets, derail the economy, and leave European
countries enfeebled in the face of competition from younger
countries elsewhere. American conservatives, such as George
Weigel, have accused Europe of “committing a form of demo-
graphic suicide”.1 Even European analysts, such as the French
Institute (IFRI), have warned that an old and decrepit continent
is in danger of becoming irrelevant on the world stage.2 Much of
their analysis shares the dismal world view of that great founder
of modern demographic science, Thomas Malthus. It is marked
by demographic determinism – the idea that demography dictates
human destiny. In contrast, this paper sketches out a more opti-
mistic view of the future.

There are two good reasons to believe that Europe’s demographic

1       G Weigel, ‘The Cube and the Cathedral: Europe, America and politics without God’, Basic,
        2005.
2       P Colombani, ‘Le commerce mondial au XXI siècle: scénarios pour l’Union Européenne’, IFRI, 2002.


                                                
                                                    From boom to bust


problems have been overstated. First, the impact of the looming
demographic changes on Europe as a whole is not nearly as severe
as most commentators maintain. The largest challenge is posed
by the passage of the large baby boom generation into retire-
ment. By mid-century, dependency ratios – that is the propor-
tion of workers to non-workers – will begin to stabilise. While
individual countries, most notably Germany and Italy, could face
population decline, the population of the continent as a whole
should remain fairly stable. Nor is Europe unique in experiencing
substantial demographic change – all developed countries, and
an increasing number of developing countries, are going through
the same process.

Second, much of the pessimistic commentary ignores the potential
for Europe to adapt to demographic change. There is already
a healthy debate – and a fair degree of action – on pensions
and healthcare reform. Other reforms, especially in the too often
inefficient European labour market, should reduce greatly any
negative impact of ageing on public finances and the economy.
The presumption that Europe is destined for economic and social
calamity represents an unjustified loss of confidence in the ability
of its societies to react to the changing world.

European countries might also try to alter their underlying
demographics – either through increased immigration or by
adopting pronatal policies, designed to stimulate the birth rate.
A number of European countries, including the UK, are currently
experiencing relatively high immigration rates. Immigration can
bolster the workforce in the short term. However, the rate of
immigration would need to be maintained at high levels to alter
dependency rates over the longer term.

Pronatalism is currently becoming fashionable among policy-
makers across Europe. At the beginning of 2007, for example,
the German government introduced generous childcare benefits
– leading to a flood of media speculation about women desper-
ately trying to delay births into the New Year to qualify for the
new payments. In the UK, the major political parties are beginning
to debate whether fiscal incentives and ‘family friendly’ policies
could be used to encourage a higher birth rate.

The removal of structural obstacles to women combining employ-
ment with children, which remains a particular problem in low
birth countries such as Italy, Spain and even Germany, can be

                                 
From boom to bust


justified on the grounds of both efficiency and choice. But the
evidence that direct pronatal measures can increase the birth rate
is sketchy at best. Fiscal incentives are expensive and risk exac-
erbating social inequalities as they would need to be targeted
at those who are not currently having children – the educated
middle classes.


Europe 2050: More diverse, more unequal and a little
older

Projections about what Europe will look like in 2050 are neces-
sarily tentative. An unexpected surge in the birth rate and/
or continuing high immigration rates could greatly alter the
demographic outlook by the middle of the century. Inevitably,
a European generalisation conceals a wide variety of different
experiences at the level of individual countries. However, it is
possible to depict some likely trends that are common across the
continent:


:       Absolutely but not relatively older. The first and most
        obvious trend is that Europe will be on average older.
        The median age is set to rise from 40.5 to 48 in 2050,
        according to the UN. There will be more people over 65
        than at any point in history – although after 2050, as the
        baby boom generation passes into history, the numbers
        will begin to stabilise. However, society will not neces-
        sarily seem much older than today. People are living
        longer first and foremost because they are physically and
        mentally healthier. A healthy 70 year old in 2050 is likely
        to have the same mental and physical capacity as a 60
        year old now.
:       A more heterogeneous society. Demographic change
        is not the sole factor driving the growth of diversity in
        Europe, but will continue to play a role at a number of
        levels. Immigration looks set to continue as long as EU
        economies have a need for extra workers – and Europe’s
        southern neighbours, in particular, have a huge surplus of
        young people. Family structures also are likely to become
        increasingly diverse as the two child family declines in
        importance. In many European countries, including the

                                
                                                   From boom to bust


       UK, childlessness has risen sharply. In other countries,
       such as Italy and Spain, one child families have become
       increasingly common. A growing section of the popula-
       tion will have no experience of sibling relationships and
       the social networks they bring. Those without children
       also could become increasingly dependent on the state
       in later life.
:      Greater inequality. Without compensating policies,
       demographic change also is likely to exacerbate exist-
       ing inequalities. The well-educated will be best placed
       to adapt successfully to a longer working life. A good
       level of physical and mental health will become even
       more important. While longevity is likely to continue to
       increase, the gap between the life expectancy of rich and
       poor could widen further.
:      A continuing ability to project values? The ability of
       Europe, and its individual nations, to continue to play a
       meaningful role on the world stage will in part depend
       on its ability to adapt to, not reverse, its changing demo-
       graphics. Europe will inevitably suffer a relative decline in
       population. But economic and social success is far more
       important to the continuing relevance of European values
       in the world than population growth.

This paper is organised in three parts. Chapter 1 places demo-
graphic change in an historical and global context and considers
the challenges faced by different parts of Europe. Chapters 2 and
3 look at the impact on economic and social change and explore
how policymakers might seek to meet those challenges. The final
chapter explores whether governments can and should seek to
change the underlying demographics through immigration or by
stimulating higher birth rates.




                                
From boom to bust




:                                     1.          The European demographic
                                                  challenge

The UK, like the rest of Europe, is enduring relative demographic
decline. Europe’s share of the world population has fallen from
12.5 per cent in 1960 to 7.2 per cent now.3 On current projec-
tions it will fall even further to just 5 per cent by 2050.

TABLE 1: SHARE OF WORLD POPULATION

                                 25                                                                                    1950
                                                                                                                       2000

                                                                                                                       2050
                                 20
Percentage of world population




                                 15



                                 10



                                 5



                                 0
                                        EU          USA          China          India      Japan        Africa     South
                                                                                                                   America


UN - World Population Prospects: the 2004 revision



Europe’s recent demographic history stands in marked contrast
to that of the United States. In 1950, the US population was
only around half that of the EU-25. Today it is nearly two-thirds,
having passed the 300 million mark in October 2006.
3                                     UN Population Division, ‘World population prospects: 2004 revision’, 2004.


                                                                            
                                                                               From boom to bust


Since 1960 the European population has never risen by more
than 1 per cent in a single year. Between 1960 and 2000 the US
experienced growth of greater than this magnitude in 22 years
out of 40. On present trends, the US population will reach 400
million by 2050 while the EU-25’s will fall from 459 million now
to 450 million.

Europe’s relative demographic decline has been driven by a sharp
fall in fertility rates. European fertility rates are now among the
lowest in the world. The average fertility rate in the EU-25 stood
at 1.52 children per woman in 2005, compared with 2.66 in
1965. UN figures suggest that 14 European countries will face
population decline by 2050 due to below replacement fertility
rates (that is the average of 2.1 births per woman defined as
necessary to maintain a stable population) and negligible immi-
gration. At the same time the average age of the population is
rising rapidly.

TABLE 2: TOTAL FERTILITY RATES 1960-2005

                       3.5
                                                                               USA
                                                                               France
                                                                               United Kingdom
                       3.0
                                                                               EU-25
total fertility rate




                       2.5



                       2.0



                       1.5



                       1.0
                             1960   1965   1970   1975   1980   1985   1990   1995   2000   2005

Eurostat/UN



The decline in relative population, coupled with the ageing
process, has led many commentators to offer a gloomy prognosis
for Europe’s future. However, some of the more pessimistic
assumptions are based on a series of misconceptions about the

                                                          
From boom to bust


nature of demographic change. In particular, it is important to
dispel three myths: first, that fertility decline is a recent phenom-
enon; second, that declining birth rates are a uniquely European
challenge (or at least that the scale of the decline is significantly
greater in Europe than elsewhere); and third, that the current
highly favourable age structure of the population represents
‘normal’ demographics.


Fertility decline is not a new phenomenon

Most policy discussions of low fertility rates take as their starting
point the dip below replacement levels, which took place across
Europe between two and four decades ago. Analysts often
contrast the existing sub-replacement levels across Europe with
the much higher baby boom fertility rates to give the impression
that fertility decline is of very recent provenance.

In reality, fertility has been declining since industrialisation in most
European countries (and the US) – a period of up two centuries.
Fertility rates in France, for example, peaked as early as 1800.
Between 1850 and 1950, France had the oldest population in
the world – causing much soul-searching among its political elite
and prompting some of the first attempts at pronatal policies in
modern times. In this context, the post-War baby boom can be
seen as an aberration – breaking the far longer running trend
towards lower fertility levels.

What is new in the last few decades is the fall below replace-
ment levels, although fertility rates were only just above these
levels during the 1920s and 1930s. Demographers have failed
to explain adequately this latest decline – the core assumption is
simply that below replacement rate fertility is unnatural. Demog-
raphers attach great importance to national replacement rates.
But for individuals who make fertility decisions such numbers
are irrelevant. The long term survival of the human race is not
in jeopardy – global fertility rates remain above replacement
levels. The population of Europe and its constituent nations is
at an all time high. On current trends, Europe’s population will
fall only marginally by 2050. In this context, there is nothing
unnatural about fertility rates in individual countries declining
below replacement level.


                                  0
                                                     From boom to bust


Fertility rates are declining worldwide

The second misconception is that declining and sub-replacement
birth rates are a uniquely European problem. Fertility is falling in
almost all regions of the world. Global fertility rates have declined
from 6 to 2.9 since 1972, according to the UN.

Over half the world’s population now live in regions with below
replacement level fertility. Sub-replacement fertility is no longer
only confined to developed countries, and the special case of
China. UN figures show that 25 developing countries including
Iran, Sri Lanka, Cuba and North Korea are already at or below
replacement level.

The UN’s projections suggest that most developing countries will
dip below replacement level by mid-century. While this seems
a reasonable assumption on existing trends, predicting fertility
rates remains a tricky business. There are a few countries where
fertility rates fell sharply from pre-industrial highs but have subse-
quently remained a little above replacement levels for as long as
50 years, such as Uruguay and Argentina. Meanwhile, fertility
rates in Israel and Malaysia have held firm at around 3 for the
last decade.


Europe’s current demographics are unusually
favourable

The final misconception is that the current age structure of the
population – in particular, the ratio between workers and the
retired – is ‘normal’. Many commentators make the highly unflat-
tering comparison between the ‘dependency ratio’ of workers
to retired, which stands at around 4:1 in Europe now, to the
projected rate of 2:1 by 2050.




                                  
From boom to bust


TABLE 3: THE NUMBER OF WORKERS PER RETIRED PERSON
1950-2050
                                       8

                                                                                                              US

                                       7                                                                      Germany

                                                                                                              France
Number of workers per retired person




                                       6                                                                      Britain

                                                                                                              EU

                                       5




                                       4




                                       3




                                       2




                                       1
                                           1950   1960   1970   1980   1990    2000   2010   2020   2030   2040    2050


UN population projection 2004

Commentators and some governments have employed these
statistics to warn of a looming pensions and public spending
‘time bomb’ – and insist on urgent far-reaching reform of fiscal
policies.

There are two objections to basing the need for radical policy
changes primarily on these dependency ratio measures. First, a
significant part of the worsening trend is specific to the demo-
graphics of the baby boom generation, the large generational
cohort born between the end of the war and the mid-1960s. At
present, the working age population is swollen by this group. As
they move into retirement, the non-working population increases
sharply – while the numbers of working age decline. However,
as the baby boomers gradually die off, the proportion of workers
to retired will slowly stabilise. In Germany, for example, the ratio

                                                                              
                                                                                                                From boom to bust


of workers to retired improves slightly after 2040 while in the UK
it remains static.

Second, this emphasis on the ratio between workers and the retired
does not fully capture dependency rates. Most obviously, children
are also dependants. The decline in fertility rates has resulted in
a fall in the proportion of dependent children within the popula-
tion. The ratio of children and retired to those of working age
— commonly termed the total dependency ratio — is not projected
to rise as steeply in the coming decades. The rise in the number
of retired is partially offset by the decline in the number of child
dependants.

In many countries, the total dependency ratios in 2050 more
closely resemble those of 1960s — when the majority of the
baby boom generation were still children — than now. In the US,
for example, the dependency ratio peaked in 1965 when there
were 67 dependants for every 100 people of working age. By
2050 the figure will be 61 dependants for every 100 workers
— lower than in 1965, although much higher than the uniquely
favourable figure of 49 today.4

TABLE 4: OVERALL DEPENDENCY RATIOS

                                     80                                                          US
                                                                                                 Germany
Number of children and retired per




                                                                                                 France
 100 of working age population




                                     70
                                                                                                 Britain
                                                                                                 EU


                                     60




                                     50




                                     40
                                           1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050


UN Population Projection 2004


4                                         G Burtless, ‘Does population aging represent a crisis for rich societies?’, Brookings Institute,
                                          January 2002.


                                                                                 
From boom to bust


But even this measure of dependency rates fails to capture fully
the balance between working and dependent populations – espe-
cially in low employment countries in Europe. Adults of working
age, who are not in employment, are also dependants. An increase
in employment levels can therefore greatly reduce the ratio of all
economic dependants to workers (see next chapter).

Governments will still face some extra costs due to the changing
age structure. Pensioners consume more public spending than
children, although economists are divided as to whether the
overall economic costs (that is including the private spending of
families on children) are higher.5 Nonetheless, the shift from a
large number of children in the post-War period to retired depend-
ants in the coming decades will force up public spending. As the
figures above demonstrate, this increase in dependency ratios is
by no means unprecedented, nor as worrying as the crude statis-
tics might suggest.


Europe: one demographic challenge or many?

There are certain demographic factors common to all European
countries. For example, every EU member-state has sub-replace-
ment fertility levels and will experience a sharp rise in the number
of retired in the coming decades.

However, such generalities conceal some stark differences in the
demographic outlook. Even small differences in fertility or immi-
gration levels now could have major consequences by the middle
of the century.

This becomes apparent when considering the population projec-
tions for Europe over the next 50 years. The population in three
EU member-states — the UK, France and Ireland — is set to rise
between 2005 and 2050. But population is already declining in
seven out of ten of the new EU member-states. Other countries
are set to follow in the near future, including Germany and Italy.
Such differences are hugely important to the pace and urgency
of the political response to demographic change.



5       R Easterlin, ‘Growth triumphant: The twenty-first century in historical perspective’, University
        of Michigan Press, 1998.


                                               
                                                                        From boom to bust


TABLE 5: POPULATION CHANGE 2005-2050

                    3.5
                    3.0
                    2.5
                    2.0
                    1.5
Percentage change




                    1.0
                    0.5
                           France   Germany Hungary   Ireland   Italy     Latvia   UK
                    0.0
                    -0.5
                    -1.0
                    -1.5
                    -2.0
                    -2.5
                    -3.0
                    -3.5

UN population projection 2004
                                            UK
‘Lowest-low’ fertility                      Latvia
                                            Italy
Demographers have recently coined the term ‘lowest-low fertility’
to refer to countries where the total fertility rate (TFR – see page
                                 Ireland
17) has dropped below 1.3. Countries with below replacement
level fertility rates (without offsetting immigration) will ultimately
                                 Hungary
experience a fall in population. But the pace is much more rapid
in countries with lowest-low fertility.
                                            Germany
The population of a country with a TFR of 1.3 would halve in just
45 years. To put this in context, Germany has had below replace-
                                France
ment level fertility rates for more than 30 years but its population
is only now on the cusp of decline. However, if it maintained its
2005 fertility rate of 1.32, its population — before immigration
— would halve in just 46 years. In contrast, at current fertility
rates it would take 196 years for the French population to suffer
the same level of decline.

Lowest-low fertility also has an exaggerated impact on the age
structure of the population. At present fertility levels, the median
age in Italy is projected to rise from 42.2 now to 52.7 by 2040,
compared with an increase from 39.1 to 44.4 in France.

                                              
 From boom to bust


 Lowest-low fertility is a very recent phenomenon, first becoming
 apparent in Italy and Spain at the beginning of the 1990s.
 However, there are now 17 countries in Southern and Eastern
 Europe which have these very low fertility rates, along with
 Japan, Korea, and probably urban China, in Asia.

 Demographers are divided as to whether lowest-low fertility
 represents a temporary shock — with fertility rates soon rising
 back towards levels seen elsewhere in Europe — or whether it
 will prove more enduring. As the box below explains, the TFR
 measure may sometimes paint too pessimistic a picture of the
 longer run trend. In Central and Eastern Europe the collapse in
 fertility rates closely correlates with the end of communism when
 many of the child support structures were swept away, including
 nurseries and family allowances. Women may have chosen to
 postpone births due to economic and social uncertainty. Conse-
 quently, the birth rate may rebound as prosperity and security
 returns. In some countries there is tentative evidence of a bounce
 back in fertility. In the Czech Republic and Estonia fertility rates
 have risen in the last five years. However, the TFRs of other
 Central and East European countries, such as Poland, Lithuania
 and Slovakia, have continued to decline.

 TABLE 6: SELECTED EU FERTILITY RATES

                        2.0
                                                                                                              2000
                                                                                                              2005


                        1.5
 total fertility rate




                        1.0




                        0.5




                        0.0
                                         Germany

                                                   Estonia


                                                             Ireland

                                                                       Spain


                                                                               France




                                                                                                Lithuania


                                                                                                            Poland


                                                                                                                     Slovakia


                                                                                                                                Sweden
                                                                                        Italy




                                                                                                                                         UK
                              Republic
                                Czech




 Eurostat
    Czech Republic EstoniaIreland Spain                  Poland
Germany (including ex-GDR from 1991) France ItalyLithuania          Sweden
                                                              Slovakia United Kingdom
                                                                               
                                                                         From boom to bust


Spain and Italy, meanwhile, have undergone a very rapid demo-
graphic transition. Here again, TFR rates may be painting too
pessimistic a picture of the birth rate, because the largest change
has been a tendency to delay the birth of the first child. Fertility
rates are now above their troughs – (falling as low as 1.17
in Spain and 1.2 in Italy during the mid 1990s), giving some
credence to the view that the number of births will continue to
pick up. However, there is no certainty about how far or how
long this revival will continue.


    Total Fertility Rate
    The total fertility rate (TFR) is the standard demographic measure
    of the average expected number of births in a woman’s lifetime.
    It is constructed using the recorded births in the previous year,
    which are then adjusted to take into account the individual’s
    age. From this data, the estimated total number of births during
    childbearing years is calculated. The TFR is thus a projection of
    the fertility rate – rather than the actual measure (which can
    only be calculated once a generation of women have passed
    their childbearing years). This means that the TFR can fall rapidly
    if women chose to postpone births — even if the decline in
    completed fertility rates is ultimately more modest.



Childlessness and one child families

One other distinctive demographic factor in parts of Europe is a
sharp rise in the numbers of people remaining childless. In several
countries, most notably Germany, childlessness is a key cause of
the falling birth rate. In Germany, the number of childless women
has risen from 12 per cent among those born in 1940 to 32 per
cent for those born in 1965 (26 per cent in 1960).6




6       H Birg, ‘Auswirkungen und kosten der Zumwanderung nach Deutschland’, Institut für Bevölk-
        erungsforschung und Sozialpolitik’, 2001.


                                            
From boom to bust


TABLE 7: CHILDLESSNESS

                                         30

                                                                                          1960
Percentage of women having no children




                                         25                                               1940


                                         20


                                         15


                                         10
                                                          *
                                         5


                                         0
                                              Austria France Germany Ireland   Italy   Spain Sweden   UK

* French data from 1957.

Eurostat/Billain and Philipou



However, the rise in childlessness is not directly correlated with
the lowest fertility rates. In Italy and Spain – the low birth rate
is associated with the prevalence of one-child families. In Spain,
for example, the proportion of women with only one child rose
from 7.5 per cent for those born in 1940 to 28 per cent in 1965.
Moreover, some countries with relatively high fertility rates also
have high levels of childlessness. Ireland has the second highest
total fertility rate in Europe (having recently been overtaken by
France) at 1.88 children per woman, but childlessness has risen
from 5 to 16 per cent. Similarly, the UK has a TFR of 1.80 while
the percentage of women without children has almost doubled
from 10 per cent among women born in 1945 to 18 per cent for
those born in 1959, according to the Office for National Statis-
tics. In contrast, the percentage of childless women remains low
in relatively high fertility France (8 per cent) and in low fertility
Spain, where the figure has only risen from 8 to 10 per cent
despite the sharp fall in the birth rate.

The growth of childlessness in countries such as the UK,
Germany and Ireland poses a new challenge for policymakers.


                                                                        
                                                    From boom to bust


Some demographers are concerned that childlessness is gradually
becoming established as a social norm in these countries. The
fear is that the practice will carry over into the next generation in
even greater numbers, causing far more rapid population decline.
At the very least, the growth of childlessness raises questions
about the provision of social policies, such as long term care
for the elderly. The rise in childlessness could lead to a collapse
in ‘informal’ care by relatives, leaving a substantial body of the
population potentially more reliant on the state (see chapter 3).




                                 
From boom to bust




:     2.        The economic impact of
                demographic change

Population growth is normally regarded as essential for economic
growth. The European Commission, for example, claims in its
Green Paper on demography that: “Never in history has there
been economic growth without population growth.”7 Similarly,
the American writer Philip Longman has argued that: “Capitalism
has never flourished except when accompanied by population
growth and it is now languishing in those parts of the world
where population is stagnant.”8 This chapter considers whether
demographic change will damage the European economy. In
particular, it examines the possible impact of demography on
three crucial areas of economic activity: the labour market,
productivity and government spending.

A drag on growth?

A malign view of the economic impact of demographic decline
can be traced at least as far back as John Maynard Keynes.
The British economist worried in the 1930s that falling fertility
would harm the economy because of too few consumers stoking
demand. However, such simple determinism is not fully borne
out by the facts. East European countries, such as the Czech
Republic and Estonia, are among the fastest growing economies
on the continent, despite beginning to suffer population decline.
Similarly, after a decade of slump Japan’s economy is now
growing healthily even as its population falls.

Contemporary economists tend to stress the importance of a
country’s age structure to growth, rather than a rise or fall in
the overall size of the population. Economies can potentially
7       European Commission, ‘Confronting demographic change: a new solidarity between the genera-
        tions’, 2005.
8       P Longman, ‘The global baby bust’, Foreign Affairs, May/June 2004.


                                            0
                                                                           From boom to bust


benefit from a ‘demographic dividend’ — a decline in the fertility
rate which leads to a fall in the overall dependency ratio. At
the same time the labour supply rises as more women enter the
workforce. This large working age population saves for retire-
ment, providing resources for further investment and offering a
boost to the economy. Economists have argued that up to a
third of the East Asian economic ‘miracle’ can be attributed to
this phenomenon.9 Similarly, some of Ireland’s recent economic
success story can be attributed to the benefits of its own belated
baby boom ‘bulge’ generation, following a decline in birth rates
throughout the 1970s and 1980s.10 However, favourable demo-
graphics cannot trigger growth in isolation: governments must
adopt sensible economic policies, while outward migration rates
also need to fall, before a country can create such a virtuous
growth circle.

Europe as a whole has benefited from such favourable demo-
graphics in recent decades. However, this economically positive
age structure is now coming to an end. The working age popula-
tion will soon begin to shrink while the numbers of retired will
rise substantially, leading to a large jump in the dependency ratio
(see previous chapter). Many economists worry that Europe faces
an ‘ageing recession’ – falling demand, collapsing asset values,
shrinking corporate profits, deteriorating household and financial
balance sheets and gaping budget deficits.

There is little doubt that Europe’s changing demographics will act
as a drag on overall economic output in the coming years. One
economist calculates that over the last three decades popula-
tion growth in the industrial economies has contributed between
half and two-thirds of the total increase in GDP.11 But the size
of the working population is now beginning to decline in much
of Europe. The OECD estimates that the shrinking workforce will
reduce overall economic growth in Europe by 0.4 percentage
points a year until 2025 and then by 0.9 percentage points there-
after. The effect will be for trend growth to decline from 2.2 per
cent now to 1.8 per cent between 2011-30, and to just 1.3 per
cent from 2031-50.


9       D Bloom et al, ‘Global demographic change: dimensions and economic significance’, Harvard
        Initiative for global health, April 2005.
10      D Bloom and D Canning, ‘Contraception and the Celtic Tiger’, Economic and Social Review, vol
        34 (3), winter 2003.
11      P Hewitt, ‘Depopulation and ageing in Europe and Japan: the hazardous transition to a labour
        shortage economy’, International Politics and Society, January 2002.


                                             
From boom to bust


Those European countries with the worst demographics are
at risk of the sharpest slowdown in growth. Underlying GDP
growth in the Central and Eastern European member-states will
drop from 4.3 per cent currently to just 0.9 per cent by 2050
(although part of this slowdown reflects a gradual fall in the pace
of productivity growth as the economic ‘catch-up’ period draws
to a close). This will translate into a decline in per capita income
growth for the EU as a whole from 1.7 per cent now to 1.1 per
cent by 2050.12

However, it would be simplistic to conclude that Europe is doomed
by its demographics to a future of penury. Even this pessimistic
forecast of future growth represents a doubling of per capita
GDP from current levels over the next half century – at the same
time as the numbers in retirement double. A more comprehen-
sive measure of economic welfare (as opposed to simply wealth)
should also consider the prospects for a further rise in health
standards and longevity.

Most forward economic modelling assumes that behaviour
remains largely unchanged. But this ignores the great potential
for economies to adapt to the changed demographic circum-
stances. Longer working (both in terms of later retirement and
more hours), higher employment rates, and increased immigra-
tion all have the potential to reduce the strain of demographic
change on European economies. Improved mid-career training
can diminish any potential fall in productivity caused by an
ageing workforce. Most governments have begun the process of
reforming pension systems to ensure that taxes do not need to
rise to unsustainable levels to fund retirement benefits. Moreover,
as the previous chapter demonstrated, European countries are
not alone in having to deal with the impact of demographic
change on their economies. Even booming China will soon have
to grapple with similar difficulties. Demographic change is not a
uniquely European competitive disadvantage.

However, this reform process will not be pain free. In particular,
those individuals least able to adapt to a longer and more flexible
working life could fall further behind. Demographic change risks
further increasing the gap between an educated majority and a
long low-skilled ‘tail’. Bad policymaking could also compound the
budgetary challenges.

12      J Sleebos, ‘Low fertility rates in OECD countries: facts and policy response’, OECD, 2003.


                                              
                                                                           From boom to bust


Labour markets

The decline in labour market supply will act as a drag on developed
world economies in the coming decades.

The previous chapter considered the impact of a falling working
population on dependency rates. It showed that overall depend-
ency ratios will increase from current levels, although not by as
much as the most pessimistic commentators assume. However,
many European economies remain extremely inefficient in their
use of labour. There is a great deal of room for improving employ-
ment rates, which would significantly mitigate against worsening
dependency ratios.

Demographic change is greatly increasing the incentive for
societies to get more people into work. For many European
countries, simply meeting labour market best practice – such
as the EU’s ‘Lisbon’ target of a 70 per cent employment rate –
would substantially reduce dependency ratios. If all EU countries
reached this target, it would virtually offset the negative impact
of ageing.13 Even those countries with high employment rates,
such as the UK, Sweden and Denmark, still have substantial
pockets of underemployment which could be further reduced.

Directly increasing labour market participation rates by reducing
unemployment or encouraging people off incapacity benefits
is only part of the solution. Policymakers are also beginning to
grapple with the need to raise retirement ages, to reflect rising
longevity. An increase in the effective retirement age of seven
years would have the same effect as raising employment rates to
70 per cent.14 Or, as the Australian demographer John Caldwell
puts it, the dependency ratios of the 1960s can be recreated by
delaying retirement to 72 for countries with TFRs of 1.6, and 75
for those with TFRs of 1.3.15

At root, Europe faces a labour market problem not a demographic
crisis. Governments should therefore place the greatest emphasis
on increasing employment. This pamphlet is not the place to
add to an already crowded field offering detailed prescriptions
13      Goldman Sachs, ‘Lisbon agenda crucial to combat ageing’, Euroland Weekly analyst, 1 April
        2005.
14      European Commission, ‘Economic and financial consequences of ageing populations’, European
        Economy Review, November 2002.
15      J Caldwell et al, ‘Policy responses to low fertility and its consequences: a global survey’,
        Journal of Population Research, Vol 19 (1), 2002.


                                             
From boom to bust


to individual countries on labour market reform. However, two
general points are worth making:

First, policymakers should place a much greater emphasis on
total economic dependency ratios, which include all adults of
working age not in employment as well as dependent children
and the retired. The use of total economic support ratios would
highlight the significant problem of underemployment – which
governments can do something about – rather than the seemingly
intractable problem of demographic change.

The tables below provide an illustration of the impact of changing
employment rates on overall dependency rates. They estimate
the total economic dependency ratios for the UK, US, France and
Germany using two scenarios for employment — 70 per cent
(which represents a fall in employment levels for the UK and
US) and 80 per cent (which is the British government’s long
term employment target). In all four countries, dependency ratios
would be lower in 2050 than now if employment reached 80 per
cent. At an employment rate of 70 per cent, dependency ratios
would deteriorate — albeit to levels that are not extreme in a
historical context.
                                                                                                                                                                          Future projection based on 80% employment
TABLE 8: TOTAL ECONOMIC DEPENDENCY RATESon1870-2050
                               Future Projection based 70% employment



                                     200
                                                                              UK                                                                             200Future projection based on 80% employment
                                                                                                                                                                                                 USA
Dependents per 100 people employed




                                                                                                                        Dependents per 100 people employed




                                                                                                                                                                Future Projection based on 70% employment

                                     150                                                                                                                     150




                                     100                                                                                                                     100




                                     50                                                                                                                       50
                                                                                                                                                                   1870
                                                                                                                                                                          1910
                                                                                                                                                                                 1950




                                                                                                                                                                                                             2010
                                                                                                                                                                                                                    2020
                                                                                                                                                                                                                           2030
                                                                                                                                                                                                                                  2040
                                                                                                                                                                                                                                         2050
                                                                                                                                                                                        1970
                                                                                                                                                                                               1990
                                                                                                                                                                                                      2000
                                           1870
                                                  1910
                                                         1950




                                                                                     2010
                                                                                            2020
                                                                                                   2030
                                                                                                          2040
                                                                                                                 2050
                                                                1970
                                                                       1990
                                                                              2000




                                                                                                                                                                   1913 1973 1998 2020 2040
                                                                                                                                                                1870 1950 1990 2010 2030 2050
                                          1913 1973 1998 2020 2040
                                       1870 1950 1990 2010 2030 2050




                                                                                                                        
                                                                                                                                                                                                                                         From boom to bust


                                      200                                                                                                                                                      200
                                                                                                       France                                                                                                               Germany
                                                                                                                                                                                                  Future projection based on 80% employment                                        Future projec



 Dependents per 100 people employed




                                                                                                                                                          Dependents per 100 people employed
                                                                                                                                                                                                  Future Projection based on 70% employment                                        Future Projec

                                      150                                                                                                                                                      150




                                      100                                                                                                                                                      100




                                       50                                                                                                                                                       50




                                                                                                                                                                                                      1870
                                                                                                                                                                                                             1910
                                                                                                                                                                                                                    1950




                                                                                                                                                                                                                                                2010
                                                                                                                                                                                                                                                       2020
                                                                                                                                                                                                                                                              2030
                                                                                                                                                                                                                                                                     2040
                                                                                                                                                                                                                                                                            2050
                                                                           1870
                                                                                  1919
                                                                                         1950




                                                                                                                     2010
                                                                                                                            2020
                                                                                                                                   2030
                                                                                                                                          2040
                                                                                                                                                 2050




                                                                                                                                                                                                                           1970
                                                                                                                                                                                                                                  1990
                                                                                                                                                                                                                                         2000
                                                                                                1979
                                                                                                       1990
                                                                                                              2000




                                                               1913 1973 Future 2030 2050
                                                            1870 1950 1990 2010 projection based on 80% employment2020 2040
                                                                         1998 2020 2040              1913 1973 1998
                                                                                                  1870 1950 1990 2010 2030 2050
                                                                                                          Future Projection based on 70% employment
UN / author’s calculation



Second, policymakers should also seek to increase greatly the
        200
number of people over 64 in work. According to the European                                                                                      USA
                                      Dependents per 100 people employed




Commission, just 5.6 per cent of 65 to 74 year olds are in work in
Europe compared with 18.5 per cent in the US. This should include
measures to reduce incentives to early retirement and make the
transition into retirement more flexible (see chapter 3).
        150
In theory, European countries could also encourage greater labour
market participation among the young in an effort to extend
working life. In practice, there is some tension between achieving
this ambition and the equally pressing need to raise education
        The
levels. 100 percentage of young men active in the EU labour
market has fallen from 60 per cent of 15-19 year olds in 1970
to around 33 per cent now.16 For women the decline is from 50
to 25 per cent. But the employment rate for 15-24 year olds in
the EU is 13.4 percentage points lower than in the US, which
has a similarly high tertiary education participation rate. This gap
         50
                                                                                                1870
                                                                                                         1910
                                                                                                                     1950




                                                                                                                                                                                               2010
                                                                                                                                                                                                       2020
                                                                                                                                                                                                                    2030
                                                                                                                                                                                                                              2040
                                                                                                                                                                                                                                         2050




suggests there is room to improve employment rates, without
                                                                                                                               1970
                                                                                                                                           1990
                                                                                                                                                        2000




jeopardising education – by curbing excessively long university
courses as well as reducing high youth unemployment.

Education also needs to take better account of changing work
             the1913 1973 1998 2020 2040
                   1950 1990 2010 2030 approaching 50
patterns. If1870average age of the workforce is 2050
a system entirely focused on training those in their early 20s is
16                                                                                European Commission, ‘Report of the high level group on the future of social policy in an
                                                                                  enlarged European Union’, May 2004.


                                                                                                                                                        
From boom to bust


inadequate. The institutions and routines of higher education need
to be re-examined. In particular, policymakers should encourage
individuals to undertake more training during their working life.
Money now spent on early retirement could be redirected to mid-
life training. In the longer term, governments should consider
introducing what one economist describes as a “truly flexible
social policy” which substitutes sabbaticals for a fixed retirement
age — leaving individuals to decide at what stages they wish to
exit the labour market to train and how they should provide for
their retirement.17


Productivity

At the simplest level, economic growth is generated by two
factors: the labour supply (both in terms of the numbers of people
in employment and the hours worked) and the rate of produc-
tivity. As Europe’s workforce begins to shrink, the economy will
become even more reliant on strong productivity to generate
growth. As one report recently concluded: “Over time labour
productivity will become the dominant and in some countries the
only source of growth.”18

However, some commentators worry that the ageing process
itself will act as a drag on productivity. David Willetts, the British
Conservative politician, has argued that ageing societies will
“have fewer Picassos” — youthful entrepreneurs prepared to
break with convention and tradition and thus improve produc-
tivity.19 Similarly, Philip Longman has claimed that “we are living
in a world of declining inventiveness.”20

This argument is based on a straightforward assumption: that
older workers are less innovative and less adaptable, and hence
ultimately less productive. For example, Longman points to
evidence from the Global Entrepreneurship Monitor (GEM) that
most entrepreneurial activity is undertaken by educated indi-
viduals between 25 and 44 years old. He concludes that fewer
young people will mean a slowing in the growth of new and

17      P Hewitt, ‘Depopulation and ageing’, 2002.
18      EU Economic Policy Committee, ‘Impact of ageing populations on public spending’, February
        2006.
19      D Willetts, ‘Old Europe? Demographic change and pension reform’, Centre for European Reform,
        October 2003.
20      P Longman, ‘The global baby bust’, 2004.


                                             
                                                                                                      From boom to bust


innovative businesses, and consequently productivity rates are
likely to decline.

There is some evidence that countries with an older popula-
tion exhibit lower growth rates (see table 9). Lower productivity
could become a by-product of lower growth – firms refrain from
making the necessary investment due to falling profits. As a
result, capital drifts overseas to look for better rates of return, in
turn meaning there are fewer funds available to maintain overall
productivity rates.

TABLE 9: GROWTH AND THE PROPORTION OF OVER 65s
1995-2005
                                               3.5
1995-2005 average annual growth (percentage)




                                                                 Canada
                                                       USA

                                               3.0
                                                                                           UK


                                               2.5
                                                                                            France


                                               2.0


                                                                                                             Italy
                                               1.5                                                Germany

                                                                                                     Japan

                                               1.0
                                                  10                              15                                 20
                                                             Average percentage of over 65s in population
OECD



However, the arguments in support of declining productivity
in an ageing society are not entirely convincing. They tend to
confuse the related, but not identical, concepts of innovation and
productivity. An economy can be productive without necessarily
being innovative – fine-tuning and perfecting innovations from
elsewhere, for example. It is also possible to have an innova-
tive economy – in terms of high levels of new business creation
– that is not especially productive.

There is evidence that risk-taking declines with age, as the GEM
report suggests. But, it is not clear whether it is age per se that

                                                                             
From boom to bust


matters or proximity to retirement. If retirement ages steadily
increase, the period in which people take risks may extend.

Productivity pessimists have also failed to demonstrate convinc-
ingly a clear link between the size of the youthful population and
innovation rates. While the current younger generation is small
compared to that of its baby boomer parents, it is still much
larger than those that preceded it. There is no simple correlation
between the age make-up of a population and innovation rates.
Rapidly ageing Japan and Germany, for example, continue to
have very high rates of patent registration per head of population
– one standard proxy measure of innovation capacity.

In reality, economists are divided over whether demographic
change will have a negative impact on productivity rates. One
piece of recent research, for example, has concluded that the
effects of ageing per se are not particularly strong on produc-
tivity rates.21 Another study found that ageing does not have a
significant impact on the aggregate productivity level.22 Even on
a worst case scenario – that productivity declines sharply after
an individual reaches 50 – it would prompt no more than a 2.5
per cent decline in aggregate productivity over the next 20 years,
and then stabilise. Others have stressed that it is not age but
time in the job that matters in terms of improving productivity.
An individual’s productivity continues to increase up until around
13 years in one job and then goes into decline.23

Moreover, there is a counter argument that productivity growth
rates will intensify because a scarcity of labour will stimulate
incentives for the efficient use of resources. Economic historians
point to the sudden surge in productivity and innovation which
helped redress the labour shortages caused by the Black Death
in medieval Europe.

There is little hard evidence that older societies will inevitably
suffer a dramatic drop in productivity levels. Furthermore, any
decline can be compensated for by modest changes in labour
force participation rates, and improved education and skills
training throughout the working life of an individual.

21      Alexia Prskawetz et al, ‘The impact of population ageing on innovation and productivity growth
        in Europe’, European Commission, 2006.
22      J Martins et al, ‘The impact of ageing on demand, factor markets and growth’, OECD working
        paper No. 420, 2005.
23      International Labour Organisation, ‘Protected mobility for employment and decent work: labour
        market security in a globalized world’, 2005.


                                              
                                                                            From boom to bust


Public spending

Many commentators have painted a very negative view of the
outlook for European public finances. They argue that EU govern-
ments are saddled with open-ended pension commitments,
and spiralling health costs, which could leave some countries
facing bankruptcy. At the very least, member-states are facing
the necessity of either drastically reducing pension and welfare
provision and/or raising taxes – which in itself could further
undermine economic growth.

However, the latest EU assessment presents a somewhat more
benign view of the pressure on public finances. In part this
reflects action taken over the last few years to try and impose a
ceiling on pension and health care costs. Most noticeably, Polish
reform of its pensions systems means age related expenditure
is expected to decline in the coming years. The EU’s economic
policy committee concluded that: “Reforms enacted in several
EU countries since... 2001 appear to have curtailed the projected
increase in public spending significantly in half of all EU-15
member states.”24

TABLE 10: RISE IN AGE RELATED EXPENDITURE AS
PROPORTION OF GDP
     12
                                                                            2030
     10                                                                     2050
      8
      6
      4
      2
GDP




      0
      -2
      -4
      -6
      -8
           ES FR      IE    IT    NL PT         FI   SE UK CZ HU PL                SI EU25
EU Economic Policy Committee

24         EU Economic Policy Committee, ‘Impact of an ageing population’, 2006.


                                               
From boom to bust


Any future projection of public spending must carry a health
warning. The forecasts rely on a number of key assumptions that
could prove wrong. In particular, they build in a rise in participa-
tion rates for older workers (those aged between 55 and 64)
from around 40 per cent now to 59 per cent by 2025. Further-
more, the EU presumes that government will further reduce
the eligibility and level of welfare benefits. The impact of these
assumptions is to offset 70 per cent of the expected increase
– meaning that the impact would be much greater if they fail to
materialise. The forecasts for those countries which tie pension
benefit levels to prices rather than wages are also very sensitive
to small changes in productivity growth rates. The faster the
pace of productivity growth, the smaller the amount spending
will rise as a proportion of GDP.

European governments cannot therefore be confident that they
have placed their public finances on a sustainable footing,
despite the recent improvement. The European Commission
recently published a broader assessment of the long term health
of public finances which concluded that six member-states – the
Czech Republic, Greece, Cyprus, Hungary, Portugal and Slovenia
– were at “high risk” of budgetary problems in the longer term.25
The report emphasised that many countries had made progress
in reducing the risks to their budgets from demographic change.
However, too many start from a position of existing large deficits
(which are not age-related) and are vulnerable to difficulties in
the medium term. Even the UK is regarded as a ‘medium risk’
country — although its forecasted rise in age related spending is
modest due to the recent rise in its budgetary deficits. Across the
EU as a whole, the Commission estimates the gap between the
actual budgetary outcome, and a position it regards as sustain-
able, at 3.5 per cent of EU GDP.


Ever rising health care costs?

Many commentators depict a dystopian future for public health
systems overwhelmed by vast numbers of increasingly decrepit
baby boomers. Age pessimists, such as Philip Longman, have
argued that a general rise in disability levels, and in particular
the rise in obesity, will vastly increase the pressure on health
25      European Commission, ‘The long term sustainability of public finances in the European Union’,
        2006.


                                             0
                                                                             From boom to bust


resources. In the UK, over 65s currently make up around 16
per cent of the population but consume 30 per cent of health
care resources according to the Office for National Statistics.
The OECD has meanwhile estimated that average spending in
member countries on public health and long term care could
increase to 13 per cent of GDP from 7 per cent now.26
But, as a number of economists have pointed out, the more pessi-
mistic forecasts tend to take a linear view of health spending.
They ignore the relative improvement in health in recent decades
and presume that people will spend more years ill and/or disabled
even as longevity continues to increase.27
Life expectancy has risen because overall health has improved.
People live longer because they are healthier. The quality of
health of most individuals at age 60 is equivalent to those aged
45 to 50 a half century ago.28 Disability-free life expectancy is
accelerating faster than overall life expectancy.29 The period of
ill-health that people suffer ahead of death is remaining constant.
In other words, people do incur extra healthcare costs before
they die – but the amount is relatively constant whether death
takes place at 60 or 90.
There are strong reasons therefore to believe that demographic
change will not have a devastating impact on health budgets.
There will be some extra costs — the growth of the retired cohort
means an inevitable spike in health spending as they reach the
end of their lives. Ireland, Spain and Italy face especially large
spending increases in the future because of the pace of the tran-
sition from a young to old population. The OECD estimates direct
demographic factors could push medical spending higher in these
countries by 4 percentage points of GDP by 2050.
The rise in obesity could also place an extra burden on health
services. But this is not an ageing problem as such. In fact, obesity
reduces life expectancy. Some experts are even predicting that
the century long increase in longevity could go into reverse due
to this new problem.30
26      OECD, ‘Economic outlook’, May 2006.
27      T Callen et al, ‘How will demographic change affect the global economy?’, IMF, February
        2004.
28      R Holzman, ‘Demographic alternatives for ageing industrial countries: increased total fertility
        rate, labour force participation or immigration’, paper for G-20 workshop on demographic chal-
        lenges and migration, Sydney, August 2005.
29      P Mullan, ‘The imaginary time bomb, why an ageing population is not a social problem,’
        I B Tauris, 2000.
30      S Olshanksky et al, ‘A potential decline in life expectancy in the United States in the 21st
        Century’, New England Journal of Medicine, 2005.


                                               
From boom to bust


Demographic change is not the most important factor driving
increasing health costs. Recent economic work has sought to
explain the rise in terms of individuals placing greater value on
the extra years of life delivered by good healthcare over other
forms of consumption.31 One of the most valuable and produc-
tive opportunities for spending is to purchase better health,
and consequently longer lives. The law of diminishing returns
suggests that the additional utility from increasing consumption
falls as consumption rises. But additional life does not have a
diminishing return. Hence, as societies become richer they tend
to devote proportionately more money to health rather than other
forms of consumption. One recent report has estimated that this
trend could push health spending towards 25 to 35 per cent of
GDP by 2050 – dwarfing any demographic related increases.32

Demographic change is consequently not the only, or even the
largest, threat to healthcare costs and public finances in general.
In isolation, governments should be able to manage the increased
pressures on their finances. However, too many European govern-
ments, including the UK, are starting from a position of existing
budgetary weakness. Moreover, uncertainties about future
dependency ratios and further increases in longevity, coupled
with expected rises in health spending, mean no government
can become complacent about the outlook for public finances.
Governments should follow the lead of Sweden and tie the
pensionable age to future rises in longevity. This would provide
one transparent and fair means to help ensure the future sustain-
ability of public finances.


An inter-generational conflict?

Will policymakers find it increasingly difficult to enact needed
reforms to pensions and healthcare systems in the future? A
growing number of commentators claim demographic change
could spark an inter-generational conflict as the large baby
boom cohort seek to preserve their economic privileges, such
as pension and healthcare rights, at the expense of the much
smaller younger generation.


31      Federal Reserve Bank of San Francisco, ‘More life versus more goods: explaining rising health
        expenditures’, 27 May 2005.
32      R Hall and C Jones, ‘The value of life and the rise in health spending’, NBER, 2004.


                                             
                                                                       From boom to bust


David Willetts, for example, has written that: “A young person
could be forgiven for believing that the way in which economic
and social policy is now conducted is little less than a conspiracy
by the middle aged against the young.” Martin Wolf, the
economics commentator, has argued that giving parents extra
votes on behalf of their children is “an essential reform if the old
are not to strangle their societies.”33

UK proponents of the generational conflict argument point to
the introduction of student tuition fees, high levels of personal
indebtedness and a more competitive job market as evidence that
the generation leaving education now is facing an increasingly
difficult start to adult life. In contrast, their parents are enjoying
the fruits of rising property prices, and the legacy of generous
defined benefit pensions not available to their offspring. In turn,
government is exacerbating the problem by using debt to fund
rising public spending, including off balance sheet innovations
such as the private finance initiative, which will leave the younger
generation to foot the bill.

In Europe this argument is played out against the debate over the
future of the illusive European social model. Economic liberals
criticise the baby boom generation for introducing high payroll
taxes to fund their welfare provisions, and rigid labour market
laws designed to protect those already in work at the expense of
the young entering the job market.

There are two substantial problems with such a sweeping thesis.
First, there is little evidence of any emerging conflict. Voting
patterns do not show any strong correlation with age (although
the young remain less likely to vote). Indeed, all the evidence
suggests inter-generational solidarity remains strong. Parents and
grandparents are as likely to be motivated by the needs of their
family as by their own personal wants. For every baby boomer
‘squandering’ the family inheritance, another is investigating how
to minimise inheritance taxes.

A poll in the United States found that nine out of ten people
believe that older Americans receive about or less than their fair
share of government benefits and have the right amount or too
little influence.34 Similarly, a survey in the UK found little evidence

33      M Wolf, ‘Through the demographic window of opportunity’, Financial Times, 28 September
        2004.
34      USC, ‘Intergenerational conflict? Think again’, November 2004.


                                           
From boom to bust


that the baby boomer generation would vote purely based on
issues that directly impacted their own generation. Education and
affordable housing remain a significant concern.35

Second, the inter-generational conflict thesis ignores the counter-
evidence that young people are on average more educated, enjoy
a higher rate of employment and are richer than their parents
were at the same age. Unemployment among the under 25s has
fallen in the UK from close to 20 per cent in the early 1980s to
around 13 per cent now.

Take the argument about student tuition fees, for example.
Tuition fees exist as a means to fund the expansion of higher
education. As a result far more people are attending university
than a generation ago. The introduction of fees has not had a
substantial negative impact on participation rates, because the
rates of return to higher education are continuing to increase.36

Young people face many challenges: affordable housing is a
particular problem, although the causes of spiralling house prices
can only partially be attributed to the baby boomers. The young
will bear some extra costs as the large baby boomer generation
ages – whether this is borne directly through taxation to fund
the welfare system or indirectly through a transfer of private
resources, such as the payment of share dividends. But the vast
majority of the younger generation can still look forward to a
wealthier and longer lasting life than their parents.




35      Opinion Leader Research/Age Concern England, ‘Winning in 2009: the importance of the baby
        boomers’, October 2005.
36      J Astle, ‘Open universities: a funding strategy for higher education’, CentreForum, 2006.


                                            
                                                                            From boom to bust




:      3. Demography and societal
       change

Demographic change in the coming decades not only has
important implications for the structure of the economy but also
for society in general. The numbers of old, especially the very
old, will rise sharply – altering the age profile of society. The
classic nuclear family — married parents and two children — still
lives on as an ideal in many countries. Increasingly, however, one
or no child families are becoming common (see chapter 1). This
change, coupled with other factors such as high divorce rates,
is likely to have a profound impact on the demand for housing
and services, including long term care for the elderly, during the
coming decades.

The changing age structure has also led a number of commenta-
tors to make pessimistic predictions about the inevitable decline
of western influence in the world. There is a common assump-
tion that societies which become older will also become more
decrepit. This chapter considers whether such assumptions are
plausible and explores how demography might alter the social
parameters of society.


The new old

Jean Fourastie, the French sociologist, speculated nearly four
decades ago that as society aged, the old would lose their special
status to become common and pitied.37 As the baby boom gener-
ation marches towards retirement, it is becoming increasingly
apparent that Fourastie’s view is far too pessimistic. The baby
boom generation is not just the largest cohort in the popula-

37     A Gauthier, ‘Trends in policies for family-friendly societies’, United Nations Economic Commis-
       sion for Europe (UNECE), 2005.


                                             
From boom to bust


tion but also controls a substantial proportion of the wealth. It
will wield considerable economic and political power in retire-
ment ensuring they can help set some of the norms for society.
Moreover, Fourastie’s thesis is based on a static view of old age.
It ignores the fact that societal ageing is principally a result of the
extension of youth and vitality. The generation reaching retire-
ment is far fitter and healthier than its predecessors.

The French academic Patrice Bourdelais has sought to try and
formalise the ‘elasticity’ of the ageing process. He has developed
the idea of equivalent age, which takes into account improve-
ments in health and life expectancy. He argues that the popula-
tion age structure remains static in relative terms: the percentage
of the population in need of age-related care does not change
over time. The point at which individuals begin to need care
moves later and later, in line with rising longevity.38 In terms of
health and fitness, a woman of 77 today is the ‘equivalent’ of a
woman of 62 in 1900.

Consequently, an ageing society may not look so different from
that of today. The sheer numbers of baby boomers mean there
will be a far greater proportion of over-64s in the coming decades.
But the ‘new old’ are unlikely to perceive themselves as aged
while they are still mentally and physically capable – nor will their
children see them that way. There is little doubt that the baby
boom generation will gradually shift society’s views on what is
old — without having to resort to clichés about bungee jumping
grannies squandering their children’s inheritance. However, at
the moment social attitudes, and welfare policies, are still lagging
the reality of the new old.

In particular, people are forced into retirement too soon. This
clearly has negative consequences for public finances, as people
move from economic activity to dependency. But it equally sends
out a false signal about an individual’s relative age. The average
retirement age in the EU-25 is 60.9, according to Eurostat. But,
as the table opposite shows, in a number of countries people on
average still retire before 60. In France and Italy, for example,
the average retirement age is 58.9 and 59.7 respectively even
though life expectancy is around 80.



38      P Bourdelais, ‘Demographic ageing: a notion to revisit’, History of the Family, vol 4 (3), 1999.


                                               
                                                                                                                      From boom to bust


TABLE 11: EFFECTIVE RETIREMENT AGE IN SELECTED EU
COUNTRIES (2005)

                           70

                           68

                           66
Effective retirement age




                           64

                           62

                           60

                           58

                           56

                           54

                           52

                           50
                                Slovenia

                                           France

                                                    Slovakia

                                                               Poland




                                                                                Austria




                                                                                                    Spain




                                                                                                                 Romania

                                                                                                                           Portugal

                                                                                                                                      Sweden
                                                                        Italy




                                                                                          Hungary




                                                                                                                                               Ireland
                                                                                                            UK
Eurostat



       European countriesItaly Austria toUnited KingdomPortugalages. In
                     Poland are trying Spain
Most Slovenia Slovakia
            France                  Hungary raise retirement
                                                   Romania        Ireland
                                                             Sweden
particular, they are phasing out misguided incentives for early
retirement, which were introduced in the 1970s and 1980s in an
effort to reduce unemployment.

There is also a general move towards increasing the age require-
ment for pension eligibility. In the UK, the government is about
to implement the recommendations of the Pension Commission,
chaired by Lord Turner, and gradually raise the age of the state
pension to 68 (by 2046). But even this move does not seem likely
to fully take into account the rapid rise in longevity. Britain, along
with other EU countries, has also recently introduced anti-age
discrimination legislation, designed to stop companies routinely
dismissing their more mature staff. But it has not yet resolved
how to make the work and pension options of those above the
traditional age of retirement more flexible.

Government cannot legislate to ensure esteem for the old. But
it can break the legally established link between old age and a
fixed retirement age of 65. In fact, the idea of a fixed retirement

                                                                                  
From boom to bust


age when everyone automatically starts to receive a pension is a
surprisingly recent innovation in most countries. Retirement was
not originally a requirement for the payment of a pension, which
were instead conceived as an old age benefit. In Britain, the state
pension was not tied to a fixed age of retirement until after the
Beveridge Report in 1942. A reform that made the payment of a
pension less contingent on retirement would have both fiscal and
psychological benefits. It would allow people to work longer, if
they so chose. And it would end the artificial link between 65 (or
its future equivalent), retirement and old age.


The post-nuclear family

A number of factors appear to be contributing to a decline in
the predominance of the two child nuclear family, including high
divorce rates and the rise of other forms of family structure,
especially the growth of one child or no child family groups (see
chapter 1).

Some demographers claim that the two parent, two child model
is beginning to fade.39 They argue that young people are following
the low fertility patterns of their parents. Thus one or no child
families are steadily becoming the new norm. The examples
of Germany and Austria are particularly important. They were
among the first countries to dip below replacement rates. In both
countries, the desired family size among younger age groups has
fallen sharply. In Austria, it has declined from 2.41 for women
over 55 to 1.72 for those under 35, while in Germany the respec-
tive figures are 2.13 and 1.74.40 In contrast, in France the desired
family size has risen slightly from 2.46 to 2.56.

The decline of the nuclear family could have two important
consequences in the future. First, it could lock countries into a
much sharper cycle of declining population. As one or no child
families become standard, it would become even more difficult
to raise birth rates to above replacement levels. In Europe as a
whole, however, the two child family remains the norm – with
the exception of Austria, Germany and Romania.
39      H Krieger, ‘No future without children: demographic developments in Europe’, speech to EU
        ministerial conference in Berlin, 2 December 2004.
40      European Foundation for the Improvement of Living and Working Conditions, ‘Fertility and
        family issues in an enlarged Europe’, 2004.




                                            
                                                                           From boom to bust


But the decline of the nuclear family is not just important in terms
of its impact on future population growth. It would also have a
major impact on familial relations. Demographer Nicholas Eberstadt
has argued that the prevalence of smaller family groupings would
create: “A world never before inhabited: a world in which the
only biological relatives for many people – perhaps most people
– will be their ancestors.”41 Individuals would not experience
sibling relationships and their support networks. Equally, many
people could enter old age with no children and would conse-
quently miss out on the benefits of informal care.

In the UK, there is no immediate risk of a collapse in familial networks
and consequent explosion in the public costs of providing long term
care. Indeed, in the short to medium term kin support networks
are looking relatively robust due to the prolonged co-existence of
different generations, and higher partner survival rates, as longevity
increases.42 But after 2030, the ageing population will contain
growing numbers with no children. At present, more than two-thirds
of old people in need of care receive this from their relatives.43 It is
not clear that the state is ready and able to fill this gap.


The death of liberalism?

Could demographic change also have a profound impact on
society’s values? In the US, in particular, a number of commenta-
tors have begun to question whether changing demographics will
accentuate the clash between liberal secularism and a religious
influenced conservatism.

There is strong evidence that socially conservative religious groups
have higher fertility rates than mainstream secular society — most
notably the Mormons in Utah who have the highest fertility levels
in the US. In contrast the more liberal parts of the US, such as the
East Coast states, are running below replacement fertility rates.
Liberal pessimists speculate that secular society has sown the
seeds of its own destruction. Not having children has become a
statement of modernity and emancipation for women – and they


41      N Eberstadt, ‘What if it’s a world population implosion?’, Harvard Centre for Population and
        Development Studies, March 1998.
42      Office for National Statistics, ‘Population trends 125’, Autumn 2006.
43      S Watt, ‘Not ageing equally’ in ‘2056: what future for Maggie’s children?’, Policy Exchange,
        2006.


                                             
From boom to bust


are unlikely to give up these new freedoms.44 Philip Longman
claims that modern humans have created an environment where
the ‘fittest’ individuals are those with fewest children. Thus, the
children of the future will predominately come from those at odds
with the modern environment, such as religious fundamentalists.
In addition, Longman speculates that minority religious groups
in the West, such as Muslims and Mormons, will gain a health
and longevity advantage over mainstream society as they are
less afflicted by affluence diseases, such as obesity and alcohol-
related illnesses.
This argument is now beginning to gain some ground in Europe.
Eric Kaufmann, a British academic, speculated in a recent article
that European secularism has reached its high point and would
soon go into relative decline.45 Kaufmann claims that demographic
change is leading Europe to gradually become a more religious and
socially conservative continent — more like the US — although
not necessarily a fundamentalist one. Meanwhile, some excitable
commentators, especially in the US, have pointed to higher birth
rates among European Muslim groups as evidence of not just
religious conservatism, but of fundamentalism, steadily making
ground.46 In the UK, for example, women born in Pakistan and
Bangladesh had a fertility rate of 4.7 and 3.9 respectively in
2001 compared with the national average of 1.8, according to
the Office for National Statistics.
It is difficult to test the veracity of such arguments. But it is clear
they are reliant on a hefty dose of demographic determinism. In
particular, they assume that the existing high religious conserv-
ative and low ‘secular’ fertility rates will continue indefinitely.
But there are plenty of examples of conservative and religious
societies with declining birth rates – Iran for example. Second
generation and even many first generation Muslim immigrants
have much lower fertility rates than the example cited above in the
UK. In France, the fertility rate for immigrant African and Turkish
Muslims is 0.46 children per woman higher than for population as
a whole. Without this contribution from Muslim immigrants, the
French fertility rate would decline by just 0.05 to 1.89 – hardly
the signifier of an imminent demographic revolution.47
This argument draws simplistic conclusions about the link
44      F Pearce, ‘Mamma Mia’, New Scientist, July 2002.
45      E Kaufmann, ‘Breeding for God’, Prospect, November 2006.
46      G Rachman, ‘US prophets of doom are half wrong’, Financial Times, 16 October 2006.
47      J Vaisse, ‘Unrest in France, November 2005: immigration, Islam and the challenge of integra-
        tion’, presentation to Congressional staff, January 2006.


                                             0
                                                                       From boom to bust


between Muslim immigration, conservatism and fundamentalism.
Moreover, it relies on the assumption that values are constant and
are easily transferred between the generations. It precludes the
possibility that religious values themselves change, and splinter,
or that children do not necessarily follow the belief systems of
their parents. This seems no more likely than the assumption,
which underlies Longman’s argument, that secular liberalism
was at one time destined to become completely unchallenged in
western society. European society will almost certainly continue
to become more heterogeneous. But migration, and factors such
as the spread of technology increasing access to a range of
ideas, are far more important in driving this change than religious
conservatives out-breeding their liberal counterparts.


A new world order?

Some commentators argue that the threat to liberalism does not
simply come from within western society. Demographic change
is also reducing the West’s power and prestige, and hence the
ability to project its values on the rest of the world.

Governments have long made the link between demographic
decline and the loss of military and diplomatic weight and cultural
influence. Early pronatal policies were often justified in terms of
keeping the ranks of the armed forces well stocked. Winston
Churchill summed up this fear of demographic decline in a speech
in 1943: “One of the most sombre anxieties which beset those
who look 30, 40 or 50 years ahead… is the dwindling birth rate…
If this country is to keep its high place in the leadership of the
world and to survive as a great power that can hold its own
against external pressures, our people must be encouraged by
every means to have larger families.”48

But there is no straightforward link between population growth
and international prestige. Sub-Saharan Africa is projected to be
the fastest growing population in this century, but few of its
states look ready to play a major role on the world stage. Histori-
cally, it has not been population size but technological superiority,
which is most important. The Spaniards, for example, were able
to conquer South America with tiny numbers of troops due to
48      P Demeny, ‘Policy challenges of Europe’s demographic changes: from past perspectives to
        future prospects’, UNECE, 2005.


                                           
From boom to bust


their superior weapons (and diseases unknown in that continent).
The current US global ascendancy is based on technological lead,
not on the size of its population.

China’s influence on the world is finally starting to become
proportionate to its huge population. But this is more due to its
successful economic policies than its population growth. After
all, China had a similar population lead over western countries
through most of the last 500 years. Ironically, the rising concern
over China’s power comes at a time when its demographic shape
is rapidly moving towards that of the West. China’s fertility rate
has fallen from an estimated 5.8 in 1970 to 1.8 now – although
many demographers believe it is even lower in the cities. The
median age of the population is set to pass that of the US by
2015. By 2050 the workforce will contract by 35 per cent. Less
than one in four have retirement pensions leaving the future
smaller working cohort directly responsible for supporting the
bulk of retirees. China’s population growth will peak by 2030
and then go into decline, with India set to become the world’s
most populous nation.

The fear of Europe’s (and America’s) relative population decline
in greatly exaggerated, and at times comes close to xenophobia.
The economist Amartya Sen has pointed out the share of the
world population in Asia and Africa is simply returning to the
levels of the pre-industrial world. There is nothing inherently
worrying about this process. Economic growth in China and India
is a cause for celebration because it has lifted millions out of
poverty and helped increase global wealth. Above all, it is not
clear what those who fear relative population decline are advo-
cating as a response. Given the large population shifts in the
world, to maintain Europe’s current share of the world population
would require an extra 300 million inhabitants by 2050, a rise of
40 per cent on current levels. Such a sharp increase in population
growth is neither practically nor politically feasible.




                               
                                                   From boom to bust




:       4. More people?

This pamphlet has already explored some of the ways that
governments can seek to help countries adapt to demographic
change, such as increasing employment rates. However, these
measures do not alter the age structure or the size of a country’s
population. In the last few years there has been a growing debate
about whether governments should seek to employ policies that
seek to change a country’s underlying demographics. Such
policies broadly take two forms: countries could encourage more
immigration – that is importing younger workers to bolster the
working age population; or governments could adopt ‘pronatal’
policies, that is measures, such as fiscal incentives, designed to
stimulate a rise in the birth rate.


The demographic limits of immigration

Immigration is at present one of the most contentious political
subjects in developed countries. Immigration is inextricably
bound up with the debate on issues as diverse as the threat
of terrorism, freedom of movement within the European Union,
multiculturalism and secularism.

Both pro- and anti-immigrant groups have also begun to argue
over immigration as a response to changing demographics. Pro-
immigration experts point to the necessity of accepting new
arrivals in order to lower the average age and increase the size of
the working population. The median age is rising more slowly in
the US than in Europe or Japan, in part because of that country’s
high rates of immigration. In contrast anti-immigration groups
extrapolate existing short run trends far into the future to depict
a nightmarish future of gross over-population.

Some anti-immigration groups have also begun to question the

                                
From boom to bust


supposed economic benefits of migration. The UK group Migration
Watch, for example, has sought to argue that the costs of immi-
gration (as defined by spending on education, health and other
benefits) outweigh the benefits of taxation paid by immigrant
workers.49

However, this argument pays little consideration to the wider
economic benefits of immigration, such as helping to keep
inflation under control.50 It also ignores the key point – as far as
the UK’s future demographics are concerned – that the ‘costs’
of immigrant children will be outweighed by the benefits accrued
from taxes once they begin working.

But this does not mean that immigration can somehow ‘fix’
demographic problems in the UK, or elsewhere in Europe. Immi-
grants get old and will need access to old age benefits and the
health care system in the future. The immigrant population might
initially have above replacement rate fertility levels. But fertility
levels normally quickly decline towards that of the indigenous
population. When immigrants retire they potentially exacerbate
the worsening dependency ratios, requiring countries to attract
ever larger numbers of new arrivals in order to keep these in
check. United Nations figures show just how many immigrants
European nations would need to attract to try to keep depend-
ency levels constant by 2050 (albeit based on favourable 1995
levels).51 Germany, for example, would require 188 million immi-
grants to maintain stable dependency ratios, resulting in a total
population of 299 million by 2050. Similarly, the UK would need
to absorb around 1 million immigrants a year, leading its popula-
tion to more than double to 136 million by 2050.

It is impossible to see any European country being willing to permit
immigration on this scale. However, it should be noted that the
UN figures are based on the unrealistic goal of maintaining the
highly favourable dependency ratios of the 1990s. More cautious
estimates suggest that to ease the burden of ageing Europe will
require around 75 million immigrants up to 2050.52 While the
cumulative total remains large, this translates into a net annual
immigration rate of around 0.4 per cent of the total population
each year. In contrast, immigration rates to the US averaged

49      Migration Watch, ‘The fiscal contribution of migrants’, Briefing Paper 1.1, August 2006.
50      Bank of England, ‘Quarterly Bulletin Q4’, vol 46 (4), 2006.
51      UNDESA, ‘Replacement migation: is it a solution to declining and ageing populations?’, 2000.
52      D Weil, ‘Demographic shocks: the view from history’, Brown University, 2001.


                                             
                                                       From boom to bust


0.79 per cent a year between 1844 and 1910 peaking at 1 per
cent between 1900 and 1910.

The debate about immigration as a means of tackling long term
demographic change is largely misguided. Population ageing is a
global event which at best a country can seek to slow. But the
fact that immigration cannot ‘solve’ demographic problems is not
an argument in favour of cutting off all immigration. For the UK,
immigration – and migration – are an essential part of its open
and competitive economy. Above all, there are strong political
and humanitarian reasons to permit some immigration.


The return of pronatalism

Pronatal policies have a long and often dishonourable history.
Ancient Babylonian, Greek and Roman civilisations all used laws
to strengthen the family in an effort to increase fertility. In the last
century, authoritarian regimes tainted pronatalism by employing
coercive and illiberal measures in an effort to boost the national
population. For example, Romania banned abortions under the
dictator Nicolae Ceausescu in an effort to bolster that country’s
birth rate.

More recently, pronatalism has begun to enjoy a slow political
rehabilitation across Europe. There are some political conserva-
tives in Europe who want to stimulate the birth rate by reintro-
ducing ‘traditional values’, code for forcing women back into the
home. But most of the debate is now focused on ‘family friendly’
measures which would make it easier for parents to combine
work and children, along with financial incentives such as tax
reductions and childcare benefits.


Why has the birth rate fallen?

As chapter 1 has shown, fertility decline is not a particularly
recent phenomenon. Rather, it appears to have been driven
by economic development and especially urbanisation, which
reduced the necessity of children to help till the fields and provide
food and support for parents in their old age. At the same time,
the steady fall in infant mortality has meant families need fewer

                                  
From boom to bust


children to ensure some reach maturity. More recently, the birth
rate has fallen due to factors such as the better education levels
among women, their significant entry into the labour market, plus
the widespread availability of contraception.

Economists and demographers have sought to isolate the key
factors that influence an individual’s fertility decisions. These
include household income, women’s potential earnings, the
compatibility of work and parenthood, the cost and availability of
childcare and female education levels among others. Economists
in particular stress the extra costs of children as one of the main
reasons that parents are having fewer children. These costs take
two forms. First, there is the direct expense of bringing up a
child. For example, a recent report estimated the (lifetime) cost
of rearing a child in the UK has reached £180,000 (until the age
of 21) — and this figure is rising at around 9 per cent a year, well
above inflation.53

Apart from the direct expense of childrearing, women also face
substantial opportunity costs when they have children. Maternity
payments only partially make up for lost earnings and missed
promotions. At the same time, the tangible benefits of children
have diminished. Children may look after their parents in old
age, but there is no guarantee of this benefit which will anyway
only be recouped in the distant future. Fortunately, most parents
find their offspring provide many intangible benefits – as there
appears to be little economic rationale to reproduce.

While there is broad agreement about the range of factors influ-
encing fertility rates, there is a vigorous debate about their relative
weight. There is still little understanding as to why these same
factors have resulted in a gentle decline in fertility in some countries,
but a sharp fall below replacement levels in others. As one demog-
rapher concludes: “There exists no compelling and quantifiable
theory of reproductive behaviour in low fertility societies.”54


The liberal case for intervention

The new approach to pronatalism is firmly founded on liberal
principles. Policymakers maintain that they are not seeking to

53      R Bennett, ‘Cost of raising a child reaches £180,000’, The Times, 10 November 2006.
54      H Kreiger, ‘No future without children’, 2004.


                                            
                                                                            From boom to bust


force women back into the home, but to increase the range of
choices available for women to combine work and children.

There is survey evidence which suggests that women are not,
on average, having as many children as they would like. In the
UK, the left-leaning think tank IPPR has calculated that women
are each year having 90,000 fewer children than they ideally
want.55 At the European level, a Eurobarometer survey found
that while women wanted on average 2.33 children within the
EU-15 countries, the actual achieved rate is just 2.08.56

The conclusion of this survey evidence is that policymakers
should focus efforts on removing the barriers to women having
the desired number of children – substantially raising fertility rates
in the process. However, there are major problems in drawing
firm conclusions about the potential to reverse fertility decline
from this form of survey evidence.

First, it is not clear how much of this gap between desired and
realised fertility can be easily influenced by public policy. Women
tend to overestimate their desired number of children when
young. The response of some women may reflect the expecta-
tions of society, which in most of Europe remains to have two or
more children, rather than their real desires. Furthermore, fertility
problems related to health or lifestyle issues, such as the failure
to meet a suitable partner, may prevent women from having a
family. Men on average want fewer children and can have a veto
over fertility decisions. There is little that governments can, or
should do, to remove such barriers to having children.

Second, if the decline in fertility reflected the fact that women
were experiencing greater obstacles to childbirth, the gap between
desired and achieved fertility should have widened in recent
decades. On average there has been some increase in the gap,
although the trend is not especially consistent (even declining
among the youngest age group of women with completed
fertility).57 However, the proportion of women stating that they
have fewer children than they would like is not rising. Instead,
it is the steady and welcome decline in the number of women
having more children than they ideally wanted, which has acted
as the downward drag on the overall average.

55      M Dixon and J Margo, ‘Population politics’, IPPR, 2006.
56      Eurobarometer 56.2, ‘Family and social situation’, Autumn 2001.
57      T Fahey and Z Spéder, ‘Fertility and family issues in an enlarged Europe’, Eurofound, 2004.


                                              
From boom to bust


It is important to examine more closely how many women are not
achieving their desired fertility rates. The Eurobarometer survey
evidence shows that a clear majority of women (56 per cent) are
content with their fertility choices. Moreover, of the remainder,
some 12 per cent of women feel that they had too many babies.
Hence, only around one third of women claim they are not having
as many children as they would like.

A policy designed to allow women to achieve their ideal family
size also needs to help those who complain of having too many
children. This would leave a net balance of just one fifth of
women who want larger families. This fifth includes many women
who may not have had the desired number of children due to
factors beyond government intervention, as outlined above. Thus
pronatal policies – which, as the section below demonstrates,
have at best a modest impact – are likely to only be of benefit to
a small section of the population.


    Pronatal policies in practice
    A growing number of countries have begun to introduce pronatal
    policies over the last decade in an effort to reverse the perceived
    demographic crisis:
    Germany: The Christian Democrat government in Germany made
    a bold statement of pronatal intent by appointing Ursula von der
    Leyen, a mother of seven, as minister for the family in 2005.
    Von der Leyen has warned that unless the birth rate picks up
    the country would have to “turn the light out”.58 The minister
    recently introduced a series of reforms designed to boost the
    birth rate, including the requirement that men take two months
    off work to look after newborn children if they want to qualify for
    state funded child welfare support. New state funded maternity/
    paternity payments, which came into effect in January 2007,
    compensate two-thirds of previous income up to a maximum of
    €1,800 each month. Parents can also offset up to €3,000 of
    childcare costs each year against tax.
    France: France has long had Europe’s most developed pronatal
    policies. One unique feature of the French system, which is
    steadily gaining interest elsewhere, is its focus on encouraging
    women to have three or more children. The French government
    has concluded that it is the decline of larger families, rather than

    58        L Harding, ‘Germany agonises over 30 per cent childless women’, The Guard-
              ian, 27 January 2006.



                                           
                                                                        From boom to bust



the rise of one or no child families, which is the key factor behind
the fall in fertility. Furthermore it is arguably easier to encourage
parents who already have children to have more than to encour-
age a childless couple to start a family. This approach is also
relatively cost-efficient, as it means extra funds are targeted at
the minority of families considering three or more children, rather
than the still overwhelming majority of those who have at least
one child.
The French system includes income tax reductions, based on
the number of children in a family, plus other generous subsidies
such as the carte famillie nombreuse which provides reduced cost
travel on public transport. A reform in 2005 further increased
the emphasis of the French system on encouraging women to
have a third child. The government doubled child benefit levels
to €1,000 a month for women who take time off to look after a
third child. This focus on the third child seems to be paying some
dividends. One recent comparative study of British and French
fertility rates found that all social groups in France are more
likely to have a third birth than in Britain, although the two child
nuclear family remains very much the norm in the former.59
Sweden: Sweden, like the UK, does not have an explicit pronatal
policy. Policy is primarily concerned with combating child poverty
and supporting educational development rather than fertility. But
Sweden’s adoption of a wide range of ‘family friendly’ measures
is often viewed as a model for a liberal approach to pronatalism.
Sweden introduced generous maternity and paternity provision
and expanded its universal childcare system, most notably during
the 1980s. These measures may have helped lift fertility rates
in the late 1980s but the boom subsequently petered out by the
mid-1990s (see below).
Asia: East Asian governments have responded to their own
shrinking fertility rates by introducing a series of pronatal
measures. Japan — which spends just 0.6 per cent of GDP on
family policies compared with 3 per cent in Scandinavia — has
appointed its first minister of state for gender and social affairs.
The government in 2005 introduced maternity pay rights with the
state contributing 40 per cent of the costs. Singapore meanwhile
has adopted a more idiosyncratic approach — in 2003 launch-
ing the ‘Romancing Singapore’ campaign designed to encourage
marriage and children. The campaign has included the launch of
perfumes and a government backed dating agency.

59        O Ekert-Jaffe et al, ‘Fertility, timing of births and socio-economic status in
          France and Britain: social policies and occupational popularisation’, Popula-
          tion vol 57 (3), May-June 2002.



                                         
From boom to bust


Do pronatal policies work?

A growing number of governments are employing pronatal
policies. However, evidence of their effectiveness can best be
described as mixed.

A limited number of country case studies have sought to assess
the impact of pronatal policies on fertility rates in recent decades.
One study examined the Canadian state of Quebec which adopted
a large range of pronatalist policies, including a third birth bonus
in 1989.60 The study concluded that while these policies led to
a short term recovery in birth rates, fertility levels remain among
the lowest in Canada and there appears to have been little long
term benefit (although it is possible that fertility rates could have
been even lower without these policies).

More recent research has focused on Sweden and France. As
the box on page 49 shows, Sweden introduced a range of
‘family friendly’ measures during the 1980s. This led to fertility
rates climbing to a peak of 2.14 in 1990, but by the end of that
decade the birth rate slipped back, falling to 1.54 in 2000. Some
analysts have linked this decline with cutbacks in public spending
on children in 1990s. But it seems more likely that women simply
brought forward births – with little long term impact on the overall
birth rate. In line with other European countries, including the UK
and France, the fertility rate has again risen since 2000.

The example of Sweden in the 1980s and 1990s provides an
important context for the current surge in French birth rates. The
French fertility rate has climbed from 1.7 in 1995 to as high as
2.0 in 2006, according to provisional French government figures.
As the box above shows, France has focused its spending on
family benefits. It spends the second highest proportion of GDP
on family benefits after Finland.61

Some economists have directly linked the rebound in French
fertility rates with pronatal measures such as the introduction in
1985, and subsequent reform in 1994, of the allocation parentale
d’education, a benefit paid to mothers who chose not to work
after the birth of a second child. One study concludes that around
half of the increase in births between 1995 and 2000 can be
60      P Demeny, ‘Policy challenges’, 1997.
61      M Sircelj, ‘The European population committee’s recent demographic studies and their relevance
        for social cohesion’, European Population Papers Series, No. 2, 2002.


                                              0
                                                                          From boom to bust


directly related to this reform.62 However, it is too early to assess
whether the latest surge represents a sustained increase in fertility
rates, or is simply the result of women bringing forward births
that would have occurred anyway. The difference in fertility rates
between France, with its explicit pronatal approach, and the non-
interventionist UK is marginal if viewed over the last 40 years
– averaging just 0.01 extra births per woman.63


Which policies work?

A number of studies have sought to examine the impact of
specific policies on fertility rates. Governments have employed
two different types of measures (although not necessarily exclu-
sively) to try to raise fertility rates. First, as in the example of
France, governments have sought to incentivise couples to have
more children through financial benefits. Second, policymakers are
increasingly introducing ‘family friendly’ social policies – flexible
maternity and paternity leave, increased childcare provision etc –
to try to make it easier to reconcile employment and parenting.


Tax and benefit incentives

Child-contingent cash benefits or tax credits could have a
positive impact on family size – but only if linked to the number
of births. Higher parental income may lead to increased demand
for children (the income effect). But it may also lead to increased
demand for a higher quality of life (the substitution effect) and
thus a reduction in the number of children. Many parents choose
to use increased income to improve the quality of care for their
offspring, rather than have more children.

As a result of these competing demands, the evidence is that
raising child benefits or increasing tax perks has at best a modest
impact on fertility rates. The leading comparative study found
that there is a positive impact from fiscal measures – albeit very
small.64 Its study of 22 industrialised countries suggests that a

62      G Laroque and B Salanie, ‘Does fertility respond to financial incentives?’, CEPR discussion
        paper 5007, April 2005.
63      O Ekert-Jaffe et al, ‘Fertility, timing of births’, 2002.
64      A Gauthier and J Hatzius, ‘Family benefits and fertility: an economic analysis’, Population
        Studies, 51 (3), 1997.


                                             
From boom to bust


25 per cent increase in family allowances resulted in an increase
of 0.07 children per woman. Or, to put it another way, a £2.5
billion annual increase in spending on child benefit would raise
fertility rates in the UK from 1.80 to 1.87.

Other studies have found even less positive impact – suggesting
that fiscal incentives might provide a short term boost but have
little long term impact on fertility rates. For example, a US study
on tax exemptions for low income households with dependants
found a strong positive impact on family birth decisions. But the
greatest impact appears to be on timing.65


Family friendly policies

It is even harder to quantify the impact of a raft of ‘family friendly’
policies on fertility rates. In particular, there are difficulties estab-
lishing the direction of causality – are women having children
because of flexible working arrangements, or do women who
already have children seek out those jobs which have the least
impact on their child’s upbringing?

There are many other trade-offs. The OECD, for example, finds
that increasing maternity pay can raise fertility rates. However,
higher rates of maternity pay encourage longer leave periods,
which can then reduce future earnings prospects, thus dimin-
ishing the fertility impact.

Maternity leave is the longest established ‘family friendly’ policy
in most developed countries. More recently, many countries have
begun to follow the Swedish example of encouraging fathers to
take some leave as well. There is some evidence of a positive
impact on fertility rates – albeit on a modest scale.66

Evidence of a positive relationship between the availability of
childcare and increased fertility rates is even more limited. One
study found a positive relationship between the provision of
childcare and aggregate fertility in 21 OECD countries.67 The
OECD survey cites a number of studies which found fertility rises
when childcare provision improved (although again questions
65      J Sleebos, ‘Low fertility rates’, 2003.
66      A Gauthier, ‘Trends in policies for family friendly societies,’ UNECE, 2004.
67      F Castles, ‘The world turned upside down: Below replacement fertility, changing preferences
        and family friendly policy in 21 OECD countries’, Journal of European Social Policy, vol 13 (3),
        2003.


                                               
                                                                            From boom to bust


about whether this leads to a permanent rise or simply affects
timing remain unanswered).

However, a separate study of childcare and fertility in Sweden
found no evidence that that country’s high levels of childcare
provision increased the probability of second or third births.68 A
Norwegian survey found a 20 percentage point increase in the
provision of childcare would result in an increase of no more than
0.05 children per women in a completed fertility cohort.69


Structural obstacles

Few contemporary advocates of pronatal policies would regard
the fiscal or family friendly measures outlined above as suffi-
cient to stimulate fertility rates. In many parts of Europe, struc-
tural problems in the labour and housing markets are the biggest
barriers to fertility.

Historically, socially conservative countries maintained higher
birth rates. There was a clear link between high female education
and employment levels and low fertility. However, in recent
decades this link has been broken in developed countries. There
is now a close correlation between high levels of female employ-
ment and relatively robust fertility rates.




68      G Anderson et al, ‘Do childcare characteristics influence continued childbearing in Sweden?’,
        Max-Planck Institute for Demographic Research, 2003.
69      O Kradual, ‘How the local supply of day-care centres influences fertility in Norway: a parity
        specific approach’, Population Research and Policy Review, 13 (3), 1996.


                                             
From boom to bust


TABLE 12: FEMALE EMPLOYMENT RATES AND FERTILITY (2002)

                             2.2


                                                                     US
                             2.0                     IE


                                                      FR
Total Fertility Rate (TFR)




                             1.8
                                                                    NL
                                                                     FI        SW
                             1.6                                     UK


                                                               AT
                             1.4
                                                          JP
                                   IT    ES                    DE
                             1.2    GR    PL



                             1.0
                                40            50            60            70             80
                                 Female employment (% of the female working-age population)
OECD


Those developed countries least able to reconcile having children
with high levels of female employment, tend to have the lowest
fertility rates. Women in these countries increasingly participate
in the labour market, but have no compensating changes to assist
with their domestic roles. Understandably, many women choose
to postpone or even forego childbirth to ensure they can continue
to pursue a career.

In these low fertility countries the tax and benefits system, and
employment rights, are still geared towards a male single wage earning
model. Women are expected to exit the labour market when they
have children. Factors as diverse as school or restricted shop opening
hours make it difficult for women to work and have children.

Housing and employment also invariably loom large in a couple’s
decision when to have children. The American economist Richard
Easterlin has suggested that birth rates will rebound when

                                                          
                                                                            From boom to bust


young people enjoy a speedier transition into the labour market.
However, the correlation is not perfect: France possesses rela-
tively high fertility rates but also high levels of youth unemploy-
ment. David Willetts has shown that in countries such as Italy,
there is a strong connection between the late age at which the
young leave the parental home, due to difficulties accessing the
housing market, and low fertility.70 As Willetts states: “Living at
home with your parents is a very powerful contraception.”

In the UK, the age of childbirth is also creeping up. Some commen-
tators have blamed this in part on the increasing difficulty many
first time buyers face in getting on the housing ladder. Whether
this will translate into a further decline in the birth rate remains
uncertain. Fertility rates in the UK have actually crept higher in
recent years, despite the continuing rise in age at first birth.

TABLE 13: UK FEMALE AGE AT FIRST BIRTH AND FIRST
MORTGAGE

      35
                                                       Average age of woman at first birth
                                                       Average age of first time borrower


      31




      27
Age




      23




      19




      15
           1975      1980        1985       1990        1995       2000       2003        2004
Eurostat/Council of Mortgage Lenders

70         D Willetts, ‘Old Europe? Demographic change and pension reform’, CER, October 2003.

                                        B      
From boom to bust


A fair approach?

There is some evidence, therefore, that a broad array of pronatal
policies could raise fertility rates. However, the impact in most
countries is at best likely to be modest. As the discussion above
shows, it is likely to take very large sums to have a substantive
impact on fertility rates.

But is such expenditure an appropriate use of public resources?
This is not simply a question of establishing whether the long
term benefits outweigh the substantial costs of pronatal policies.
It is also whether pronatal spending is the best use of public
funds.

The key consideration for any successful pronatal policy is
ensuring that the incentives flow to those women who are not
having as many children as they would ideally like. In developed
countries, it is disproportionately the educated middle classes
who have small families or remain childless. This suggests that
to have any chance of success, policymakers will have to create
fiscal or other incentives for educated women to have more
children.

In the UK, the gap in fertility between social classes is particularly
stark. Of the generation of women born in the early 1960s, close
to one third who had completed tertiary education entered their
40s childless. Alison Wolf, the British academic, estimates that
this figure is likely to rise to 40 per cent for those born in 1970.71
Most strikingly, this increase in childlessness among educated
women is taking place at the same time as a much greater propor-
tion of the population are attending tertiary education – hence
the pool of professional women is increasing substantially. There
is now a substantial gap between the number of women in the
highest social classes (76 per cent) and those in the lowest (95
per cent) who give birth to one or more children. This phenom-
enon is not just restricted to the UK: more highly educated women
across the EU have low fertility levels.

Thus, governments would need to target pronatal policies
primarily at the middle classes. But it is highly questionable
whether governments should redirect scarce public resources
towards the better off in this manner. There is a high risk that
71      A Wolf, ‘Working girls’, Prospect, April 2006.


                                              
                                                                          From boom to bust


the adoption of pronatal fiscal policies could undermine other
pressing social justice policies and increase inequalities.


The middle class baby paradox

There is a further objection to introducing a raft of pronatal
policies designed to encourage the middle classes to have more
children: they are unlikely to work. The standard economic
explanation for why middle class women have fewer children
than other social groups is that they have better paid jobs and
therefore the opportunity costs, directly in terms of lost earnings
and indirectly of foregone promotions, is much greater. However,
Heather Joshi has shown that, proportionately, less educated
women suffer a far greater loss of earnings than those who have
been to university.

The spread of maternity provision has reduced the penalty that
educated women pay when having children. However, less
qualified women often enjoy less job protection and are forced
to leave the workforce at an earlier age, for a longer period and
are much more likely to return to work part-time. Thus, a 1970
female graduate can expect lifetime earnings amounting to 88 per
cent of that of their husband, while those with no qualifications
receive only 34 per cent. This reflects the greater reliance of less
educated women on part-time work or long career breaks.

Joshi has concluded that: “Well educated women experience the
smallest loss of earnings at motherhood, but they are also the
most likely to postpone or avoid it. Economic opportunities for
women do not appear to be seriously jeopardising the quantum
of reproduction.”

There does not appear to be a simple link between lost earnings
and middle class reluctance to have children. It may be, as jour-
nalist Madeleine Bunting among others have argued, that the
self-worth of educated parents is too dependent on a successful
career.72 Equally, the university educated have far more expensive
aspirations for their children – aspirations for which it is difficult
to justify government subsidies. As Alison Wolf has put it: “Elite
children are expensive. Children are dependent for longer. High

72      M Bunting, ‘Behind the baby gap lies a culture of contempt for parenthood’, The Guardian, 7
        March 2006.


                                             
From boom to bust


quality childcare is costly and formal education has become
increasingly important as the route to success. Parents know
this and it explains why the professional classes devote so much
money and attention to their children’s schooling.”73

                                              ***

Pronatalism may be enjoying a return to fashion but there is
little evidence that direct measures can bolster the birth rate. As
one commentator states: “We still do not fully understand why
birth rates in the OECD countries have declined so precipitously
over the past three decades and knowledge about the effects of
policies... is still too limited to guide the designs of cost-effective
interventions.”74

Untargeted pronatal policies are likely to have little effect. Policies
that are focused on those least likely to have children – the
educated middle classes – will almost certainly prove regressive.
In any case, there is good evidence that such an approach would
also prove ineffective.

Governments can best create the conditions where people might
have more children by seeking to remove the structural obstacles
to female labour market participation and improving the young’s
access to housing. Such policies can be fully justified in terms
of economic efficiency and social justice. There are also strong
grounds for providing extra help to less wealthy families with
children – in terms of helping support a child’s educational and
social development and improving their life chances. Family fiscal
policies should be framed around social justice and educational
needs, not those of pronatalism.




73      A Wolf, ‘Working Girls’, 2006.
74      J Sleebos, ‘Low fertility rates’, 2003.


                                                  
                                               From boom to bust




:   5. Summary of recommendations


:   Pessimistic predictions about Europe’s demographic
    future overstate the problem in most countries and ignore
    the potential to adapt. The presumption that Europe is
    destined for economic and social calamity represents an
    unjustified loss of confidence in the ability of our socie-
    ties to react to a changing world.
:   The evidence that pronatal, or ‘family friendly’, policies
    could raise fertility rates and alter Europe’s underlying
    demographics is sketchy at best. Fiscal incentives would
    need to be targeted at those who are not having children,
    chiefly the educated middle classes. Such an approach is
    likely to prove expensive and would exacerbate inequali-
    ties. Family fiscal policies should first be framed around
    social justice and educational needs, not as a means of
    trying to increase the birth rate.
:   The debate about using immigration to tackle long term
    demographic change is largely misguided. Population
    ageing is a global event which at best a country can seek
    to slow. But the fact that immigration cannot ‘solve’ demo-
    graphic problems is not to say that all immigration should
    be curtailed. Immigration is an essential part of an open
    and competitive economy. There are also strong political
    and humanitarian reasons to permit some immigration.
:   At root, Europe faces a labour market problem rather than
    a demographic crisis. Governments should thus make
    increasing employment the focus of policies designed to
    help tackle demographic change.
:   Policymakers should place a much greater emphasis on
    total economic support ratios, which include those adults
    of working age not in employment as well as ‘dependent’

                            
From boom to bust


        children and the retired. These measures should highlight
        the significant problem of underemployment – which
        governments can do something about – rather than the
        seemingly intractable problem of demographic change.
:       Policymakers should seek to improve employment rates at
        both ends of the working life. This means increasing the
        number of over-64s in work through measures to reduce
        incentives to early retirement and making the transition
        into retirement more flexible. European governments
        could also extend working life by encouraging greater
        labour market participation among 15 to 24 year olds.
        This should include curbing excessively long university
        courses prevalent in many parts of the EU as well as
        reducing high youth unemployment.
:       Money now spent on early retirement could be redirected
        to mid-life training, to encourage individuals to update
        their skills throughout their working life. In the longer
        term, governments should consider substituting sabbati-
        cals for retirement — leaving individuals to decide at
        what stages they wish to exit the labour market to train
        and how they should provide for their retirement.
:       Though there is little hard evidence that older societies
        inevitably suffer a dramatic drop in productivity levels,
        any such decline can be mitigated by modest changes in
        labour force participation and improved education levels
        throughout working life.
:       Demographic change is not the only, or even the largest,
        threat to public finances. However, too many European
        governments, including the UK, are starting from a posi-
        tion of existing budgetary weakness. One transparent
        and fair means to help ensure the sustainability of public
        finances would be to follow the lead of Sweden and
        tie retirement age and benefit levels to future rises in
        longevity.
:       Government cannot legislate to ensure esteem for the
        old, but it can break the legal link between old age and a
        fixed retirement age of 65. A reform of this nature would
        have both fiscal and psychological benefits, as people
        would not be forced to move from economic activity to
        dependency.

                               0
                                               From boom to bust


:   Policymakers can best create the conditions where
    fertility rates might rise by removing structural obstacles
    to female labour market participation, improving the
    young’s access to housing, and providing extra help to
    less wealthy families with children. Such policies can be
    fully justified in terms of economic efficiency and social
    justice.




                            

				
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